When the Ontario Government sold the first tranche of Hydro One last fall, it was a big deal – and not just financially. Media coverage was intense as opposition parties roundly criticized what they described as a misguided fire sale of a major public asset.
Progressive Conservative critic Todd Smith described the plan to sell 40 per cent of the utility to the public as "the worst deal in the province's history". The province's financial accountability officer, Stephen LeClair, warned that Ontario's financial position would be even worse if the plan proceeded. NDP leader Andrea Horvath called it "ludicrous" and urged Premier Kathleen Wynne to have a last-minute change of heart.
She didn't. On Nov. 12 it was announced that a total of 89.25 million shares had been sold at a price of $20.50, representing 15 per cent of the company. The province collected $1.83-billion.
At that time, it wasn't known when the next tranche would hit the market. Everyone wanted to see what would happen once the shares started trading.
It was all good news.
Unlike many IPOs, Hydro One shares opened above their $20.50 issue price and never fell below it, even during the market tumble in January. Investors saw the stock as a low-risk place to earn a respectable yield and gradually pushed the price higher. The moves weren't big – this is a staid utility after all, not the latest high tech wonder stock. But the advances were steady and when the shares hit a high of $24.50 on April 4 the government decided it was time to sell some more.
On April 5, Queen's Park announced it was proceeding with a secondary offering at a price of $23.65, about 15 per cent more than last year's IPO. On Friday, April 29, the province completed the sale, which consisted of another 83.3 million shares including the over-allotment option. The deal reduced Ontario's stake to 70.1 per cent of the company. Unlike the fire and fury that surrounded the IPO, this time hardly anyone seemed to notice.
The secondary offering grossed approximately $1.97-billion for the province, more money than the initial sale generated for fewer shares. In that sense, it was a good deal for the Ontario government. It was not so great for shareholders.
The day after the offering was announced on April 5, the market price tumbled from $24.16 to $23.55. About 8.7 million shares changed hands in the two days after the announcement, with the stock trading at more than eight times the normal daily volume as investors pushed to lock in profits.
Since then Hydro One has never traded above the secondary offering price. That suggests the market wasn't able to absorb all the new shares, creating a supply overhang. How long that will take to work through is anyone's guess, although the share price has been inching higher in recent days.
The Ontario government still has one more tranche left to sell so investors should be prepared for another hit when that happens. It's likely the price will languish until the last shoe drops. Having seen what happened with the latest offering, no one is going to want to bid the price too high.
I suggested buying the shares for income a few months ago at $22.73. The 3.6-per-cent yield is still attractive, but I wouldn't chase the stock much beyond the current level until the government has completed its sell-off.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. Follow him on twitter @GPUpdates and on Facebook.
Gordon Pape