Toronto-Dominion Bank T.TD

BMO on Cowen Acquisition

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August 2, 2022 | 10:38 ET~ TD Bank TD-TSX TD-NYSE Rating Market Perform Price: Jul-29 $83.18 Target $100.00 Total Rtn 25% TD to Acquire Cowen in US$1.3B All-Cash Deal Bottom Line:

Today, TD announced it will acquire Cowen (COWN-NASDAQ), a U.S. independent broker, in an all-cash deal valued at US$1.3 billion (US$39 per share, ~10% premium to its latest closing price). The transaction values Cowen at 1.7x TBV or 8.1x its earnings in 2023 and is expected to be modestly accretive to TD’s 2023 adjusted EPS. CET1 impact is expected to be neutral, leaving the pro forma ratio above 11% after the First Horizon acquisition.
Key Points Strategic Implications: • Aligned with TD's U.S. dollar strategy in the Wholesale business. The deal is expected to double revenue from the U.S. region, with the U.S. revenue contribution increasing to ~50% from 29% LTM.
• Adding new capabilities and industry expertise: The deal will bring new U.S. investment banking capabilities (Equity Capital Markets, Equity S&T and Execution, and Equity Research) but we see little impact on the business mix, with tradingrelated revenue representing ~50% of the pro forma total revenue.
Transaction Details: • Funding from Schwab share sale: The transaction will be funded through its sale of ~28.4 million Schwab non-voting shares for proceeds of ~US$1.9 billion (~14 bps accretive to CET1 ratio), which will reduce TD's ownership interest in Schwab to 12.0% from 13.4%. TD noted that the strategy behind its investment in Schwab remains unchanged and has no intention to further divest the remaining shares.
• Financially, TD expects the transaction to be modestly accretive in 2023: The management team has identified revenue synergies of US$300-350 million (adding net income of US$100 million by year three) and expects to see integration and retention costs of US$450 million over the first three years.
• Neutral impact on CET1 ratio: Management indicated that the CET1 will remain comfortably above 11% at close and does not have an impact on the cost or timing of the pending First Horizon transaction. Overall, we believe this transaction is not a needle mover and likely inconsequential for earnings. We also note that this may serve as a distraction for management at a time when its focus was on closing/integrating FHN, which is ~10x the capital commitment. Canadian Banks Sohrab Movahedi Analyst [e-mail] [phone] Ally Zhou, CFA Associate [e-mail] [phone] Shoban Anandarajah Associate [e-mail] [phone] Legal Entity: BMO Nesbitt Burns Inc. 120 110 100 90 80 70 60 50 Jan Jul Jan Jul 30 20 10 0 LHS: Price (C$) / RHS: Volume (mm) Source: FactSet 2YR Price Volume Chart Company Description TD Bank Financial Group provides a broad range of financial services through more than 2,300 retail branches in Canada and the U.S. TD Securities offers investment banking services. Charles Schwab is a discount brokerage in the U.S. Its U.S. subsidiary, TD Bank USA, operates on the U.S. East Coast. TD-TSX Research Glossary Company Models This report was prepared by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules. For disclosure statements, including the Analyst Certification, please refer to page(s) 3 to 6. Exhibit 1: Supports TD’s U.S. Growth Strategy Through Increased U.S Wholesale Revenues Exhibit 2: Results in a More Integrated U.S. Dealer Source: Company reports TD Bank | Page 2 August 2, 2022 TD Bank Rating History as of 07/