Why GMP might not sell its stake in Richardson GMP

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While many are expecting a Canadian bank or U.S. financial institution to buy high-net-worth wealth manager Richardson GMP Ltd. (RGMP), the acquirer may turn out to be neither.

GMP Capital Inc., which currently owns a 30-per-cent stake in RGMP, may hold on to the asset, or dig deep to make its own bid for the equity it doesn't own, according to sources. (Richardson Partners and the adviser network own the other 70 per cent).

In early September, The Globe and Mail reported that RGMP, Canada's second-largest independent wealth management company, was in play, with Toronto-Dominion Bank among the bidders. A sale of RGMP is expected to be one of the largest deals in the boutique Canadian financial services industry in years.

The bullish case for GMP to sell its stake is clear – cold, hard cash. GMP's share could be worth as much as $150-million, according to Scotia Capital Inc. analyst Sumit Malhotra, who ran the numbers earlier in the year. That cash would certainly wipe away any concerns about how GMP will pay for FirstEnergy Capital Corp., the boutique it agreed to buy for $99-million, a few months back.

But the consequences of letting go of RGMP entirely could be damaging for GMP over the longer term, industry observers say.

GMP has said next to nothing publicly about its intentions regarding RGMP, but with deep-pocketed third parties such as TD Bank and Raymond James Financial Inc. circling the asset, there's a push within GMP to keep its stake or buy out the other two owners, according to a person familiar with the matter. It remains unclear, however, where GMP could get the funds to pull off a deal to buy out its partners. (Mr. Malhotra pegged the entire value of RGMP at roughy $500-million.)

GMP declined to comment for this story.

RGMP was created in 2009, when GMP merged its wealth-management division with Winnipeg-based Richardson Partners Financial. While GMP, for the most part, hasn't made money on a quarterly basis from its share in RGMP, it has proven to be a valuable asset for other reasons.

In secondary stock issues, which are a key revenue driver for GMP's core investment banking business, having retail distribution has added both prestige and critical mass. In certain sectors, such as real estate, Canadian investment banks lean heavily on retail distribution in bought deals. But even in the core energy and mining areas, which traditionally tilt toward institutional buyers, a retail wing has proven handy for GMP on multiple occasions.

Last year, when GMP co-led Goldcorp Inc.'s deal to sell its 26-per-cent stake in Tahoe Resources, a key chunk of the roughly $1-billion secondary stock offering was sold through RGMP, according to a source.

Will GMP continue to be able to land the coveted "left lead" position on major mining underwriting deals without RGMP? Who knows? What is undisputed is that if GMP sells its retail arm, it will be reverting to its roots as a niche investment bank and relinquishing its card in the elite full-service banking club. GMP would evolve to resemble the likes of a Cormark Securities Inc., a Toronto-based mid-sized boutique investment bank that is highly regarded but doesn't have a retail arm.

Should GMP opt to sell its retail network, there may be knock-on benefits, too, for Canaccord Genuity Group Inc., one of its biggest competitors. Canaccord would be the last sizable Canadian-domiciled independent left with a hefty retail distribution network.

The Vancouver-based broker-dealer with roughly $9.8-billion under administration (versus $27-billion for RGMP) is currently making a big push to get bigger in retail. In late September, it raised $60-million, and earmarked the funds to expand its domestic wealth business.