Scotiabank makes bold $2.8bn move: What this 14.9% stake in KeyCorp means for investors

In a major move within the financial sector, Scotiabank has announced a deal to acquire a substantial 14.9% ownership stake in KeyCorp through a strategic investment. This acquisition involves the issuance of common shares at $17.17 each, marking an 11% premium over the volume weighted average price for the past 20 trading days. The total cash consideration for this investment amounts to approximately USD 2.8 billion.

Investment Breakdown and Future Prospects

The acquisition will proceed in two stages. The initial phase involves an investment of 4.9%, followed by an additional investment of around 10%, culminating in a pro forma ownership of about 14.9%. The initial investment is expected to close in the fourth quarter of fiscal 2024, with the additional investment anticipated to complete in fiscal 2025. Scotiabank expects this investment to be accretive to earnings per share within the first full year following the completion of the additional investment.

Scott Thomson, President and CEO of Scotiabank, highlighted the strategic importance of this investment. Thomson stated that this move significantly increases Scotiabank’s capital in key markets and positions the bank uniquely within North America. “We believe that this transaction provides attractive near-term returns to our shareholders and creates future optionality for Scotiabank in the North American corridor,” Thomson said. He further noted Scotiabank’s distinctive position as the only Canadian bank with a presence across Canada, the U.S., and Mexico, and expressed optimism about exploring future strategic opportunities with KeyCorp.

Synergies and Strategic Benefits

Scotiabank, ranked among the top 10 foreign banking organisations in the U.S., has a strong Global Banking and Markets (GBM) business. KeyCorp, headquartered in Cleveland, Ohio, operates a well-established U.S. business focused on commercial clients, providing a complementary fit. Upon completion of the additional investment, Scotiabank will have the right to appoint two members to KeyCorp’s Board of Directors: one senior Scotiabank officer and one independent director acceptable to both parties.

Accounting and Regulatory Details

The initial investment will be recorded as an equity investment at fair value, with future market changes reflected in other comprehensive income. Once the additional investment is complete, the 14.9% stake will be classified as an investment in an associate for accounting purposes. The Common Equity Tier 1 (CET1) ratio impact is projected to be around 10 basis points at the initial investment’s closing and a further 40 to 45 basis points upon the additional investment.

Shareholder Impact

Scotiabank also plans to suspend the discount on its Shareholder Dividend and Share Purchase Plan starting with dividends declared after August 27, 2024. This adjustment will make the August 27 dividend the last eligible for the discount.

KeyCorp’s Background

KeyCorp, with roots dating back nearly 200 years to Albany, New York, is one of the largest bank-based financial services companies in the U.S., with assets of approximately USD 187 billion as of June 30, 2024. The company operates under the name KeyBank National Association, serving individuals and businesses through about 1,000 branches and 1,200 ATMs across 15 states. KeyCorp also offers a range of corporate and investment banking products under the KeyBanc Capital Markets brand.

Advisors

For this transaction, Bank of America and Scotiabank are acting as financial advisors, with Cravath, Swaine & Moore LLP serving as legal counsel to Scotiabank.