Onex deal for Gluskin Sheff shows high-net-worth clients still in high demand

Onex deal for Gluskin Sheff shows high-net-worth clients still in high demand

Another major deal in Canada’s wealth-management world is highlighting the potential value of cross-selling to high-net-worth clients, a segment that remains sought-after in the face of disruption brought on by low-fee investing products.

On Friday, Toronto-based private-equity firm Onex Corp. announced it was making a $445-million bid to buy Canadian wealth-manager Gluskin Sheff + Associates Inc., a deal the companies said would “broaden the product suite available” to Toronto-based Gluskin Sheff’s high-net-worth and institutional clients.

“By combining Gluskin Sheff’s public securities investing platforms with Onex’ private equity and private debt platforms the clients of both firms will have greater investment options,” said Gerry Schwartz, chairman and chief executive officer of Onex, in a release.

Investors have so far smiled on the match, which is still subject to various approvals and closing conditions. Shares of Gluskin Sheff jumped more than 29 per cent on Monday, pushing the stock price past the $14.25 per-share offer made by Onex, whose shares also rose Monday.

Canaccord Genuity analyst Scott Chan noted that potential benefits of the deal included “adding (Gluskin Sheff’s) strong distribution capabilities in the attractive (high-net-worth) clientele space” and broadening Onex’s investing capabilities by adding equities, hedge funds and investment grade credit.

Chan said the “cross-selling capabilities” should also help Gluskin Sheff retain clients, after the firm saw its assets under management decline to $8.2 billion as of Dec. 31, 2018, down $700 million from Sept. 30 of last year.

“Commanding such a multiple on a standalone basis would, in our view, require a material turnaround in net flows as well as elevated performance fees both of which will be challenging to achieve near term,” wrote CIBC Capital Markets analyst Marco Giurleo in a note on Gluskin Sheff.

“On the other hand, a combination with a reputable partner such as Onex provides an opportunity to stabilize client flows and enhance the earnings power of the company by introducing highly coveted alternative investment strategies.”

A cross-selling-related rationale was also given in connection to a mega-deal in the wealth-management sector last year: Bank of Nova Scotia’s $2.6-billion takeover of MD Financial Management.

The clients of both firms will have greater investment options

That deal, according to a Scotiabank presentation, provided an opportunity to add market-share in the wealth business and “capture primary banking relationships” in the high-net-worth area in which doctor-focussed MD Financial had specialized.

The Onex-Gluskin Sheff deal (expected to close in the first half of 2019) includes a $13.3-million break-fee Gluskin Sheff would pay to Onex if the transaction doesn’t close for certain reasons, including if a superior bid comes along to scuttle it.

“Given the support of the deal by GS’ board and management as well as the 28 per cent premium offered (over Gluskin Sheff’s share price at Friday’s close), we view the probability of an interloper offering a higher price as low,” wrote Giurleo.

RBC Capital Markets analyst Geoffrey Kwan said they also believe the acquisition “is likely to be successful,” and that the announcement “should not be overly surprising” given the decline in Gluskin Sheff’s share price over the past few years.

“While we like the long-term growth potential at GS, the current challenging fundamentals were likely to constrain GS’ share price in the near-term, so this transaction provides GS shareholders with an opportunity to realize value in the short-term.”

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