Scotia Capital has turned negative on
Canaccord Genuity Group Inc. (
TSX: T.CF,
Stock Forum) in the wake of a regulatory probe into trading in shares of
Amaya Inc. (
TSX: T.AYA,
Stock Forum) ahead of gaming company’s $4.9 billion acquisition of the Rational Group earlier this year.
In a research report, Scotia Capital analyst Sumit Malhotra said he has dropped his stock price target for Canaccord to $8.75 from $11.50.
“Even without the news of the AMF investigation, it has clearly been a difficult few months for Canaccord, as the downturn in market conditions across the geographic footprint of the company has weighed heavily on both deal flow and sentiment towards the shares of broker/dealers,’’ the Scotia analyst wrote in his report.
The report notes that shares of Canaccord, which booked $30 million in revenue from its role as an advisor and underwriter to Amaya, fell 16% last Friday on news that a Quebec securities regulator is reviewing trading activity of shares in Amaya in and around the June 12, 2014, announcement that Amaya would be acquiring Rational Group.
This removed $120 million Canaccord’s market value, pushing Canaccord shares down to their 2014 low, just as the role the company had in the Amaya transaction was one of the catalysts that drove Canaccord to its year to date high of $13.49 in July, Scotia said.
Amaya shares also plunged 18.3% to $28.64 on Friday. After a small rebound Monday, the stock was off 1.9% to $27.34 on Tuesday.
Canaccord Genuity spokesman Scott Davidson told The Canadian Press that the brokerage firm is “co-operating fully with the routine request for information.’’
Nowhere in its research report does Scotia accuse Canaccord or its employees of any wrongdoing.
It should also be noted that Scotia Capital is a bank-owned rival of Canaccord, which ranks as Canada's largest independent brokerage firm.
Still Scotia says it is only stating the obvious to point out that "it is never a good thing to have regulatory agencies investigating entities that you have been involved with."
Amaya shares soared 42% to $19.95 on June 13, 2014 after the deal was made official. That was after the stock had more than doubled in value, rising 103% from the start of May up to $12.02 the day before the announcement.
“Though we will not pretend to have any special insight into the eventual outcome of the AMF (Autorite des Marches), it is important to note that the review is centred on the trading activity of AYA shares (which the company itself commented on 2.5 weeks prior to the deal), and not the acquisition,” Malhotra wrote.
The Scotia analyst went on to say that the Amaya deal was in Scotia’s view the hallmark transaction for Canaccord in 2014, as the company booked in excess of $30 million in fees from its role as both an adviser and an underwriter in a foreign acquisition by a Canadian company in a non-commodities sector.
It’s a description that checks virtually every box of how the ‘new’ Canaccord has positioned itself post the acquisition of U.K. wealth management firm Collins Stewart Hawkpoint in February 2012, he said.
In its most recent financial statements, Canaccord said it was the lead advisor and bookrunner to Amaya Gaming, and described its role as the second largest transaction in the investment firm’s history, one that helped to drive the firm's investment banking revenue up 63% in the second quarter.
Canaccord shares have since regained much of the value that was lost of Friday, clawing back 12.6% in the last two trading sessions to trade at $6.96 on Tuesday afternoon.
Still, Malhotra says he believes Canaccord is a much better long than a short at this price, and continues to rate the stock a Sector Outperform.
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