Is Manulife on the offence or defence?

awillis@globeandmail.com

Smart people at Manulife Financial are either very worried about something they see on the horizon, or very excited about an acquisition opportunity.

Or maybe they're a bit of both: A little frightened, but also hungry.

The two options explain why Manulife, proud owner of a $40 stock as recently as the summer of 2008, is now pumping out $2.5-billion worth of shares at $19 each, and selling that equity at a substantial 6 per cent discount to where it closed yesterday on the Toronto Stock Exchange.

Newly named Manulife chief executive officer Donald Guloien explained this share sale with the same conservative logic used to justify $2.275-billion of stock sales last December.

Mr. Guloien, who spent his career at the insurer before taking the helm last year in the midst of the market meltdown, said in a press release: "We believe this transaction achieves the fortress level of capital necessary to buffer against more conservative economic scenarios."

But Manulife's CEO also held out the potential for using this stock sale to fund growth, saying the financing will "position us to take advantage of highly attractive acquisition and growth opportunities."

Manulife is still itching to buy AIG units in Asia, say investment banking sources close to the company, but the insurer is constrained by balance sheet issues. And the seller - U.S. taxpayers - wants cash for those AIG divisions.

In coming months, we will probably find that Manulife wants to play defence and offence with all this money. The company will do acquisitions, but they will not likely be of the transformational scale seen when it bought U.S. insurer John Hancock for $11-billion (U.S.) back in 2003.

But the insurer now does have the capital needed to meet the promises it has made to clients. Mr. Guloien can fully shore up a balance sheet that is weighed down by exposure to the drop in equity markets. Manulife sold its clients billions of dollars worth of guaranteed savings products that were invested in stocks, without putting costly hedges in place, and these annuities and other policies now represent an enormous potential liability. This stock sale makes Manulife one of the best capitalized of global insurers.

The underwriters have an option of increasing the size of this financing to $2.875-billion (Canadian) if there is investor demand. The dealers are likely to use that option, given the healthy discount on this bought deal, and Manulife's attractive position as a leading global player in insurance.

Scotia Capital and RBC Dominion Securities are leading this transaction, the second-largest bought deal seen in a year of massive share sales, and one of the 10 largest equity offerings ever done in this country.

A bonanza for dealers

Canada's bank-owned dealers stand to earn the lion's share of fees from Manulife Financial's massive stock sale.

Manulife plans to use $1-billion of the money it raised to pay down a credit facility struck last year, during the market's worst days, with a syndicate of Canadian banks. Keep that in mind as we list the major players in this underwriting.

Manulife will pay the Street a 3.5 per cent fee for buying this stock and selling it to their investor clients, according to investment banking sources. That's a small concession to the insurer, as dealers typically charge a 4 per cent commission on these equity sales. At a minimum, the insurer will pay the dealers $87.5-million.

Lead underwriters Scotia Capital and RBC Dominion - units of the country's two largest corporate lenders - will each take 25 per cent of the fixed commissions on the transaction. CIBC World Markets ranks next, with a 12 per cent share of the fee pie. BMO Nesbitt Burns gets a 10 per cent slice, TD Securities will get 9 per cent and National Bank Financial is to receive 7 per cent.

Most of the commission pie is now gone, and only the six bank-owned firms got fed.

Citigroup, Goldman Sachs, HBSC Securities, Merrill Lynch, UBS Securities and Morgan Stanley each get 1.5 per cent of the fees. Canaccord Capital gets 1 per cent and Laurentian Bank Securities gets 0.5 per cent.

Dundee bulks up

Dundee Securities signalled it sees the commodity cycle having a long run ahead of it by hiring a pair of resource-focused analysts this week.

Dundee landed oil and gas analyst Alex Klien from Blackmont Capital, a firm that's facing more than its share of upheaval as its retail arm is sold to Macquarie Group.

To cover mining stocks - a focus for Dundee's trading desk and finance team - the firm hired industry veteran Rod Cooper. Mr. Cooper will cover the base metal plays. He was most recently the chief operating officer at Baffinland Iron Mines, and prior to that he was at Kinross Gold. In recent months, with talent on the move, Dundee Securities has quietly added 10 professionals.

See Andrew Willis's Streetwise Blog at ReportonBusiness.com