Time to reconsider i-banking valuations

For a few days this September, speculation was ripe that CI Financial (CIX.UN:TSX) would trade its 100% stake in investment dealer Blackmont Capital for a minority position in Canaccord Adams (CCI:TSX).

The Globe and Mail’s Andy Willis broke the story, and once word was out, employees at both firms needed to find out what was happening to their firm and their particular place in it. If you’re an equity research analyst, and you’re not as well-ranked as the other guy — you naturally assume that it is time to find a new job. Resumes get fired out that evening from the home email account.

Mercifully, the leak made for a short dating process between the would-be couple. According to the Globe’s follow-up piece, once it became apparent that the seller (CI) wanted more than $100 million of value, and the buyer (Canaccord) wanted to pay less, the deal was off.

When the news came out that Barclays would acquire the North American investment banking group of Lehman Brothers, complete with 9,000 professionals and support staff, I couldn’t help but notice that Barclays was paying US$250 million for the team and the business that was already on the desk. The rest of the US$1.5 billion purchase price would be accounted for by other assets, such as the Lehman New York HQ and their datacentres.

In the world of M&A, the back of every pitchbook is filled with something called a precedent transaction analysis. The Lehman/Barclays deal will have an asterix beside it, noting the nature of the distress sale. But you can’t ignore the relevance of the price Barclays is paying for Lehman’s N.A. investment bank.

CI CEO Bill Holland didn’t have the benefit of this precedent when he pulled Blackmont off the market, so it would be unfair to criticize his decision in the wake of the week’s events. But if Lehman is worth US$250 million, you can see why Canaccord balked at paying $100 million for Blackmont.

But, over at National Bank, as they negotiate the purchase of a minority stake in Wellington West Capital Markets, for example, this new valuation reality will be the elephant in the room. If you’re WWCM, you obviously won’t sell a stake unless you like the price, unless there is a strategic piece to the investment that will help WWCM grow their retail investment advisory mandate. But for National Bank, it’s time for a gut check on price — whatever the number might be.

If I’m Mr. Holland, the Barclays/Lehman deal is a convenient excuse to restart those talks. Canaccord’s shares are down 60% from their AIM-induced high, just as GMP’s units are off 50% from last year’s peak (which means that the paper Edgestone’s partners took suggests that the PE division’s value is off 50% from the 2006 valuation as well; no shame on them, though — just look at the drop in Blackstone’s shares).

So, If I’m Mr. Holland, and the brokerage and PE industry is trading well below prior levels, it should come as no surprise to the CI Board that he needs to put some water in his wine on any Blackmont sale (CI would keep the KBSH asset management business under the rumoured deal). A $251 million valuation for both Blackmont and KBSH Capital Management in 2007 truly is a ~$125 million valuation in the fall of 2008.

Which means that something less than $100 million for Blackmont is a smart deal for all concerned. Not to give Mr. Holland any advice, but he’d be well-served to lace on the skates again and get back on the ice.

MRM