TD buys Coin for $1.3 billion, doubling its ambitious plans to expand into the US

Toronto Dominion Bank TD-T is acquiring New York-based investment bank Cowen for US$1.3 billion, accelerating a ten-year plan to make TD’s capital markets division competitive across borders and doubling the US expansion plan that has begun on high gear.

Quinn is an independent trader with 1,700 employees who specializes in US stocks, an area where TD has been significantly weaker in the US. TD will pay $39 a share of Cowen stock in cash, and after adding $2 billion in annual revenue, TD Securities will generate approximately $6.8 billion in global revenue, with more than 40 percent from the United States.

The Cowen deal adds to an already ambitious offer by TD to expand its large retail banking network in the eastern US. In February, TD agreed to buy First Horizon Corp. for $13.4 billion in the largest acquisition ever made by a Canadian bank. Recently, this year, TD was criticized for being too conservative under the leadership of CEO Bharat Masrani. But the bank has spent nearly $19 billion in less than six months to advance its US strategy, after overhauling its executive team last year.

This latest deal to buy Coin is the product of that wave of change, with elements of long-term strategy as well as opportunism.

Over the past decade, TD has built its US capital markets strategy from nearly scratch to bring in $1.1 billion in annual revenue, focusing on strengths in fixed income, foreign exchange and treasury services. But TD’s global wholesale business still earns less than half the revenue of its rival Royal Bank of Canada unit, in part because it lags behind other banks in important areas. The acquisition of Cowen fills key gaps, giving TD potential it lacks in the US in capital markets, stock sales and trading, as well as research.

It also supports TD’s US business advising on mergers and acquisitions, financing and leveraging key services, and has a research team of 60 publishing analysts with expertise in areas such as environmental, social and governance issues.

TD Securities CEO Riyad Ahmed told analysts he expects the deal to speed up TD’s plan for its US wholesale banking business “easily by five years if not 10” in a conference call on Tuesday.

“This kind of platform came out as a ready-made, operable, ready-to-go platform,” he added in an interview.

After taking over the helm of TD Securities last year after a stint as TD’s CFO, he made the rounds with colleagues and clients and quickly determined that it made sense to accelerate the growth rate of the merchant arm in the United States. Mr. Ahmed and Robbie Pride, Head of Corporate and Investment Banking at TD, contacted Cowen early this year.

TD spent most of the surplus capital it accumulated during the COVID-19 pandemic to purchase First Horizon, but it had a source of financial strength in reserve. To fund the Cowen deal, TD raised $1.9 billion by selling 28.4 million shares in Charles Schwab Corp. , which reduced a stake in TD acquired in 2020 when it previously sold its shares in TD Ameritrade Holding Corp to its discount brokerage rival. At the time, those shares in Schwab were worth $37, and this week TD sold them for about $69 each.

“This was really a great opportunity to make some money and get some funding for this deal,” said Mr. Ahmed.

The price TD is paying for Coin — 1.7 times Coin’s tangible book value as of March 31, and 8.1 times Coin’s estimated 2023 earnings of $156 million — “is attractive, a reflection of the current market background,” said Gabriel Decaine. Analyst at National Bank Financial Inc. , in a note to customers.

The share sale reduced TD’s stake in Charles Schwab from 13.4 percent to 12 percent, and Mr. Masrani said the bank had no current plans to sell more shares. But the discount brokerage industry where Schwab is a pioneer faces turmoil as new online competitors push retail trading prices lower. Now that TD has shown it is ready to redirect capital from its stake in Schwab, analysts speculate that the door is open for TD to repeat the maneuver.

“They got sucked into the piggy bank for this deal, and I think they could dip into it again a couple of years from now if something else comes up,” Ibrahim Bunawala, an analyst at Bank of America Securities, Inc., said in an interview. . “I think that’s definitely on the table.”

TD’s approach also came at an opportune moment for Quinn. The investment bank has been looking for ways to fund its ongoing expansion, which has been driven in part by a focus on clients in sectors such as healthcare, biotechnology and cannabis, some of which have suffered in the recent market downturn.

“This is the first time… that we’ve felt constrained by the size of our balance sheet,” Geoffrey Solomon, Quinn’s president and CEO, said in a conference call on Tuesday. “When Riyad and his team approached our team with this idea, it made sense.”

After the close, Mr. Solomon will join TD Securities and report to Mr. Ahmed along with Cowen Co-chairs Dan Charney and Larry Wiznik. Portions of the joint work will be known as TD Cowen.

TD’s share price was affected by investor concerns about potential regulatory risks related to the First Horizon deal, which has yet to close, according to banking analysts. But Mr. Al-Mesrani said he was confident in the bank’s ability to reconcile the two deals and implement parallel integration plans.

“These are different businesses,” he said. “We’ve thought hard and done a lot of work to make sure there’s no impact… in connection with the First Horizon deal.”

To integrate Cowen with TD Securities and retain Cowen employees, TD will spend $450 million, of which $200 million is intended to give key employees incentives to stay. Mr. Deakin said the merger still poses a “fundamental risk” for the Cowen deal, as mergers are “extremely difficult when they involve investment banking operations of different cultures”.

TD expects to increase revenue from $300 million to $350 million within three years of the joint agent, and expects a modest increase in profits in 2023. The transaction is expected to close early in 2023, subject to approvals from Cowen shareholders And the organizers.

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