A hostile takeover bid for Mackenzie Financial of Toronto has put Canada's fifth largest Canadian fund company in play. What remains in doubt is whether the victor will be the opening bidder, C.I. Fund Management of Toronto. There is widespread speculation that a rival will come forward, either from within or outside Canada.

C.I.'s CAN$3.8-billion offer is to be mailed to shareholders in late November. It is subject to the tender of two-thirds of Mackenzie shares on a fully-diluted basis. No single shareholder has enough shares to block the deal on its own. The largest single block of Mackenzie shares is a 24.7 percent stake held by AIC Ltd. of Burlington, Ont., mainly in mutual funds that it manages.

AIC is also the largest shareholder of widely-held C.I., with a 19 percent stake, complicating its decision about what to do and making it a potential kingmaker.

"We have to assess the offer in the context of what it means to our unitholders" said Michael Lee-Chin, chairman and founder of AIC, in an interview. "We have to look at the impact on C.I." since if the deal went through, AIC would be the largest shareholder of an expanded C.I., he said.

Lee-Chin is among those who believe that competing bids could emerge, either from foreign or local players. He described C.I.'s bid as the "first salvo" in what could be a prolonged battle.

If C.I. were successful, it would become the largest mutual fund company in Canada, with more than $58 billion in assets. Currently, C.I. ranks seventh in the industry with $25.4 billion in assets, two rungs below Mackenzie, with $33 billion. Long viewed as a prime takeover target because it lacks a controlling shareholder, Mackenzie Financial is also majority owner of Mackenzie Investment Management of Boca Raton, Florida.

Mackenzie Financial objects to the offer as being too low, all the more so since the largest portion of the offer consists of C.I. shares, rather than cash. James Hunter president and CEO of Mackenzie, said Mackenzie, which announced it has hired CIBC World Markets, an investment banking firm of Toronto, as an advisor, "intends to vigorously pursue all alternatives to maximize value" for Mackenzie shareholders.

C.I., which currently holds a two percent stake in Mackenzie, said its offer would be paid in cash or shares, the latter at the rate of 1.7 common shares of C.I. for each share of Mackenzie. The cash alternative is subject to an aggregate maximum of CAN$600 million.

But since Mackenzie already holds $535 million in cash on its balance sheet, the effective cash cost to C.I. would be much reduced. The C.I. bid "amounts to using Mackenzie's own cash to fund their proposed offer," said Hunter, in a statement. C.I. said that if all Mackenzie shareholders elect the cash option, each shareholder will receive approximately $4.31 cash and 1.44 common shares of C.I.

The bid price of $28.25 per share, consisting of cash and C.I. shares, represents a 28.7 percent premium to the closing price on Nov. 3 of Mackenzie shares on the Toronto Stock Exchange. Before the announcement, Mackenzie shares had been up sharply on takeover speculation. (Mackenzie shares also trade on NASDAQ.)

Bill Holland, president and CEO of C.I., defended the offer as being in the interests of Mackenzie shareholders. It represents a "substantial premium" to Mackenzie's stock price and will allow Mackenzie shareholders to participate in the benefits of ownership of what would be the largest and strongest company in the Canadian fund industry, he said.

The reaction he's received from Mackenzie shareholders has been "overwhelmingly positive," Holland said in an interview. Reacting to Hunter's criticism, Holland said the offer was made to the shareholders of the company, not Mackenzie management, who he estimates hold only one percent of the company's shares. Holland owns about seven percent of C.I. and is the executive with the second largest stake in the company after chairman Raymond Chang, who recently held 10.6 percent.

C.I. has no intention of raising its offer, Holland said. "If shareholders like it, they should tender their shares," he said. "If they don't like it, we should go our separate ways."

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