TD buying Cowen for $1.3 billion, adding to its presence in US

Toronto-Dominion Bank agreed to buy U.S. brokerage Cowen Inc. for $1.3 billion in cash, bulking up its presence in American capital markets just months after striking a historic deal to expand its retail operations in the country.

Toronto-Dominion agreed to pay $39 a share, according to a statement Tuesday. The acquisition is likely to be “modestly accretive” to adjusted earnings per share next year, the Toronto-based company said. Bloomberg News reported last month that the bank was weighing the deal. 

In purchasing Cowen, Canada’s second-largest bank is addressing its relative weakness in the capital markets business relative to larger competitors such as Royal Bank of Canada and helping cushion the company from potential downturns in its retail banking operations. The deal also further deepens Toronto-Dominion’s reach into the U.S., along with its planned $13.4 billion acquisition of First Horizon Corp., announced in February.

“The acquisition of Cowen will add key capabilities to our growing global-markets platform in US equities sales and trading, and in US equity research,” Toronto-Dominion Chief Executive Bharat Masrani said on a conference call with analysts. “This acquisition will further accelerate our growth in the U.S. and position TD Securities as a North American dealer with global reach and a full suite of cross-border capabilities.”

Toronto-Dominion’s wholesale banking business accounted for about 11% of the company’s fiscal 2021 revenue. That compares with the roughly 21% that Royal Bank generated from its capital-markets division.

Cowen, which went public in 2006, saw its net income soar 38% year-over-year to $289 million in 2020 amid a record year for initial public offerings. In the past 12 months, it has acted as a bookrunner on 55 IPOs, serving as the lead adviser on five of the listings, according to data compiled by Bloomberg.

The brokerage’s shares surged 7.6% to $38.20 at 9:51 a.m. in New York. Toronto-Dominion slipped 0.7% to C$82.58.

With mergers in Canada’s highly concentrated banking sector blocked by regulators, Toronto-Dominion has long looked south for expansion. The firm entered U.S. retail banking with the $3.8 billion purchase of 51% of Banknorth Group Inc. in 2004. Three years later, Toronto-Dominion doubled its U.S. presence with the $8.34 billion acquisition of Commerce Bancorp Inc.   

Toronto-Dominion had more than 1,100 US branches at the end of its most recent fiscal year, and it stands to gain about 400 more when its purchase of First Horizon is completed. That deal would expand Toronto-Dominion beyond its East Coast footprint into markets such as Tennessee, Louisiana and Texas

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With the Cowen acquisition, TD Securities will add the New York-based firm’s 1,700 employees, bringing the total to 6,500 people in 40 cities worldwide. The deal has been approved by the boards of both companies and is expected to be completed in the first quarter of next year.

Cowen Chair and CEO Jeffrey Solomon will join the senior leadership of TD Securities, reporting to unit President and CEO Riaz Ahmed, and parts of the combined business will be known as TD Cowen, to be headed by Solomon.

“We will have added a world-class equity and research platform as well as widening our M&A and private-advisory capabilities in the various verticals,” Ahmed said on the conference call. “So I think we will have all the tools and capabilities that we need, and Jeff and I and our teams are really looking forward to crush it here.”

Perella Weinberg Partners served as financial adviser to Toronto-Dominion, and Ardea Partners and Perkins Advisors advised Cowen.

SCHWAB SALE

To provide capital for the purchase, Toronto-Dominion sold 28.4 million nonvoting common shares of Charles Schwab Corp. for about $1.9 billion, reducing its ownership stake in the company to about 12% from 13.4%. Toronto-Dominion said it “has no current intention to divest additional shares” in Charles Schwab. The Canadian bank would lose governance rights should its interest drop below 10%, Masrani said on the conference call.

Toronto-Dominion’s shares have underperformed those of two main Canadian peers with big US presences — Royal Bank and Bank of Montreal — amid doubts that it will be able to complete its takeover of Memphis, Tennessee-based First Horizon. Toronto-Dominion shares had slumped 14% this year through Friday, more than Royal Bank’s 7.2% decline and Bank of Montreal’s 6.3% drop, and the worst performance among Canada’s six largest banks.

“There has been quite a bit of underperformance for TD, and you can attribute the majority of that to what’s been happening on the regulatory front,” Stifel Financial Corp. analyst Mike Rizvanovic said in an interview before the Cowen deal was announced. “When you think about TD’s dynamic on where they make money and where they could deploy capital, if you’re on the wrong side of U.S. regulators, it’s certainly not a good thing because it is such an important market for them.”

President Joe Biden signed an executive order in July 2021 — seven months before Toronto-Dominion announced the First Horizon deal — that urged regulators to more heavily scrutinize bank mergers as part of a broader push to increase competition in the country. In June, Sen. Elizabeth Warren asked regulators to block the deal, citing concerns about the bank’s practices after the Capitol Forum reported that Toronto-Dominion wrongly pressured customers into opening certain accounts. Toronto-Dominion has said the allegations are “completely unfounded.”

Toronto-Dominion executives “have no reason to believe” the First Horizon takeover won’t be completed as planned, Masrani said Tuesday. “It’s proceeding at the pace we expected, and we are hoping that we can close it within the timeline we had stipulated.”