CI Financial's Bain PIK deal sours shareholders, leads two analysts to downgrade and sends shares south, but CEO still has faith in IPO before 2030
'CI Financial has to live with the hand it is holding,' Morningstar researcher says, because it has few cards left now to play -- without quick market help for a big IPO
4 min read- Analysts Downgraded CI Financial after a complex Bain Capital deal to reduce debt.
- Shareholders Criticize deal structure, fearing dilution and lack of respect.
- PIK Provision could give Bain-led group significant ownership if IPO fails.
- MacAlpine Affirms IPO plans before 2030 to avoid ownership shift.
- CI's U.S. RIA unit faces acquisition constraints due to cash flow changes.
BMO Capital Markets and Barclays both cut their ratings on CI Financial shares in the wake of CEO Kurt MacAlpine's bold deal to knock $1 billion off its debt load.
CI Financial Corp announced last Thursday (May 11) it was selling a 20% stake in its U.S. wealth management arm to Bain Capital LP and other investors for US$1.0 billion.
The U.S. tracking stock (CIXXF) took a wild ride, rising 40%, from $9.56 to a high of $13.72 last week, but as the deal's burdensome details became apparent, investors sent the stock south. It closed today at US$9.34.
Some shareholders were none too happy about the deal.
"This announcement of a deal for 20% of US business is a joke, and is hiding an incredibly complex deal structure that will make them appear to have less debt," said one stockholder on a CI chatboard.
“From what I understand, unless they IPO at the $7B valuation, they essentially owe the difference back to the group who bought 20%. Feels like someone pulling the wool over my eyes. I am going to sell, this kind of behaviour just reeks of disrespect for shareholders.”
No respect
CI Financial continues to feast on Blind Squirrels' membership like a cache of stored nuts
Analysts weren't far behind. BMO lowered from “outperform” to “market perform” and Barclays from “overweight” to "equal weight" – essentially a B to a C in research lingua franca.
Morningstar analyst Greggory Warren maintained a four-star rating on the stock, but expressed concerns about how the deal curtails what CI Financial has done best in the RIA market – deals.
“With future acquisitions on the back burner, the market for realizations stalled – and no real appetite for offerings with higher levels of debt attached to them-- CI Financial has to live with the hand it is holding,” said Warren.
Their concerns center on how small-print terms relinquish 40% to 45% of common share ownership rather than the 20% announced last week, because of a 14%-plus PIK, or payment-in-kind.
That means the Bain-led group will get additional ownership shares for each of the six years leading up to 2030. See: CI Financial got just the $1 billion face value it wanted for a 20% RIA rollup stake but at a 14.5% PIK, experts warn the deal's terms are brutal
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Under the gun
For now, CI common shareholders will own 80% of the U.S. RIA unit, but that amount might fall as low as 55%, BMO analyst Tom MacKinnon wrote on Friday.
Asked by the analysts whether the deal could – push come to shove – give the Bain-led group majority control, MacAlpine shot down the possibility.
CI Financial will cut off U.S. RIA unit from Canadian cash infusions as part of 2023 IPO but with a giant parting gift -- total forgiveness of its substantial mountain of debt
“There's no path to control for them,” he asserted.
MacAlpine has an out -- he must execute an IPO before investors grab ownership through the payment-in-kind provision.
Short of that, the Bain-led investors will have absolute say over whether the unit gets liquidated “In the event we're not public in 2030,” MacAlpine said on the analysts' call last Thursday (May 11) .
“But we fully intend to be public well in advance of that,” he added.
Deal drought?
On his call with Wall Street analysts, MacAlpine confirmed that the U.S. unit in Miami would no longer have cash flow from the Canadian parent to buy RIAs, or back its loans.
That left it with only its own cash flow and whatever borrowing power it might generate.
MacAlpine said CI is not inclined to borrow more now. See: CI Financial will cut off U.S. RIA unit from Canadian cash infusions as part of 2023 IPO but with a giant parting gift -- total forgiveness of its substantial mountain of debt
Meanwhile, MacAlpine discounted concerns about whether CI's RIA unit in the U.S., founded in 2020, can resume the level of 2021 dealmaking, when it flabbergasted the RIA industry by snapping up many of the great brands in a single breathtaking M&A spree.
Essentially, his firm, in essence, completed its 2023 and 2024 deals – truly a cream-of-the-U.S. crop by many appraisals – ahead of time. See: CI Financial continues to feast on Blind Squirrels' membership like a cache of stored nuts
“2021 was an unusual year because of [anticipated] tax [capital gains] changes that ultimately never went through,” he says. “People planning to sell in 2022, 2023 and 2024 tended to pull that forward.”
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