TD to buy Cowen for US$1.3-billion, doubling down on ambitious U.S. expansion plans
Toronto-Dominion BankTD-T -0.87%decrease is acquiring New York-based investment bank Cowen Inc. for US$1.3-billion, aiming to round out TD’s capital markets business after years of effort to build it into a stronger cross-border competitor.
TD will pay the purchase price in cash, which amounts to US$39 per share of Cowen stock. That equates to a multiple of 1.7 times Cowen’s tangible book value, as of Mar. 31, and 8.1 times Cowen’s estimated 2023 earnings of US$156-million.
Cowen is an independent dealer with 1,700 staff and specializes in U.S. equities, which was a weakness for TD south of the border. After adding Cowen’s $2-billion in annual revenue to TD Securities, the combined company will have global revenue of about $6.8-billion, with more than 40 per cent of that coming from the U.S., TD said.
For years, TD has tried to build up TD Securities in the U.S., where it has lagged rivals in several product categories and service areas. Most notably, TD’s U.S. investment bank did not have a significant business in equity capital markets or equity sales and trading, which is a gap that Cowen helps fill. Riaz Ahmed, the CEO of TD Securities, said he expects the deal to accelerate TD’s plan “easily by five if not 10 years,” on a conference call with analysts on Tuesday.
With this deal, “I think we will have all the tools and capabilities that we will need,” Mr. Ahmed said.
The acquisition also doubles down on TD’s ambitious plans for U.S. expansion, months after the bank made the largest deal in its history. In February, TD agreed to buy First Horizon Corp., a retail and commercial-focused bank based in Memphis, Tenn., for US$13.4-billion. That deal has yet to close, pending regulatory approvals.
TD’s share price has been weighed down by investors’ concerns about regulatory risks related to the First Horizon deal, according to banking analysts. But TD chief executive officer Bharat Masrani said he is confident the bank can close the Cowen transaction “without any impact” on the First Horizon deal.
“Our aspiration is to be a top dealer and make sure we have all the capabilities our clients require,” Mr. Masrani told analysts on the conference call.
TD’s share price was down about 1.1 per cent to $82.27 in early trading on the Toronto Stock Exchange on Tuesday.
To raise the funds TD needs to buy Cowen, TD sold 28.4 million shares it owned in The Charles Schwab Corp. for US$1.9-billion. TD owned 13.4 per cent of Charles Schwab after it sold its stake in TD Ameritrade Holding Corp. to the rival company in 2020. TD now owns 12 per cent of Charles Schwab and Mr. Masrani said the bank has no current plans to sell more of the stock, and has maintained its voting rights.
As the discount brokerage business changes rapidly, under pressure from online rivals, the sale allows TD to redirect some of its investment to U.S. investment banking, which has been identified as a high priority.
The price TD is paying for Cowen is “attractive, a reflection of the current market backdrop,” said Gabriel Dechaine, an analyst at National Bank Financial Inc., in a note to clients.
Mr. Ahmed and TD’s head of corporate and investment banking, Robbie Pryde, first approached Cowen early this year, Mr. Ahmed said. In addition to special expertise in equities, TD was also attracted to Cowen’s advisory capabilities and research expertise, which includes environmental, social and governance research.
For Cowen, the approach came at an opportune moment when the investment bank was looking for ways to fund its expansion, which has happened partly through acquisitions.
“This is the first time – probably in the history of Cowen, at least over the last decade – where we’ve felt constrained by the size of our balance sheet,” said Jeffrey Solomon, Cowen’s chair and CEO, on Tuesday’s conference call. “When Riaz and team approached our team with this idea, it made logical sense because it was very much in tune with the strategy that we were looking to pursue anyway.”
Should the deal close, Mr. Solomon will join TD Securities and report to Mr. Ahmed, along with Cowen co-presidents Dan Charney and Larry Wieseneck. Parts of the combined business, led by Mr. Solomon, will be known as TD Cowen.
In the first three years, TD expects to reap what it calls “revenue synergies” of US$300-million to US$350-million. The bank also expects the costs of retaining Cowen employees and merging the two businesses to add up to US$450-million over the same span, with US$200-million of that sum earmarked to persuade key Cowen employees to stay on.
“A primary risk is related to integration, which is notoriously difficult when involving investment banking operations with different cultures,” Mr. Dechaine said.
Based on those estimates, TD expects the acquisition will modestly add to its profits in 2023.
The bank also expects the effect on its capital levels to be neutral. But because of heightened risks in the global economy and uncertainty around interest rates, it has instituted a hedge for accounting purposes to protect its capital levels when it closes the First Horizon transaction. The bank expects its common equity Tier 1 ratio – a common measure of capital strength and financial resilience – to remain above 11 per cent even after both deals close, which would be higher than regulatory minimums.
The deal is expected to close in the first three months of 2023, subject to approvals from Cowen shareholders and regulators.
