Canadian chief financial officers are going to be reading the prospectus from Fort Chicago Energy Partners' latest bought deal with considerable interest.
The pipeline company raised $160-million this week, and in doing so, successfully challenged the bank-owned dealers' oligopolistic power to set fees. This otherwise unremarkable financing is going to set a precedent as other companies raise money, and there's plenty of financing activity taking place.
Fort Chicago ran a fairly standard beauty contest on its financing, asking all the big dealers to compete for its patronage based on the price at which they would sell its units to the public. However, the company also invited the Street to be competitive on fees. TD Securities opted to step up on this front.
Bought deals for the smaller energy and business trusts have traditionally been done with a 5-per-cent commission for the dealers involved. However, the largest REITS and biggest energy plays, such as TransCanada Power LP, have been sold with a 4-per-cent fee. That's the same levy charged on a typical stock sale. So clearly, fees are not carved in stone.
TD Securities tossed Fort Chicago a bid with a 4.5-per-cent fee, and won the day. When it came time to syndicate the transaction -- bring other dealers in to assist with the sales effort -- the five other bank-owned dealers turned up their noses. Such boycotts are unusual, but not unheard of.
However, Canaccord Capital, FirstEnergy Capital and Westwind Partners were willing to accept the structure and pricing proposed by TD Securities. The trio joined the sales effort, and the Fort Chicago deal moved forward. It is interesting to note that the leadership of TD Securities includes a core of Newcrest veterans who broke with the pack by setting up their own brokerage house in 1995 and competed successfully against the bank-owned dealers.
The Fort Chicago units were priced late on Monday last week at $12.70 each -- they closed at a record high of $12.91 on Friday -- and closed yesterday at $12.67 on the Toronto Stock Exchange. Not all the units have sold just yet, but given the popularity of trusts and all things energy, this financing is highly likely to go down as a success. TD Securities will bank the lion's share of a $7.2-million fee from Fort Chicago.
It's dangerous to draw a conclusion out of a single transaction, but what's happened this week at Fort Chicago has to influence pricing on future financings. Other CFOs -- and it's a very tight community -- are going to look at this transaction and wonder what the Street can do for them, if pushed. The bank-owned dealers are being forced to compete on fees, something they've been loath to do in the past.
Trust in pizza
If ever there was a company custom-made for the trust market, it's Pizza Pizza.
The top sellers of slices in Ontario, with a 28-per-cent market share in double-cheese-and-pepperoni, launched what's expected to be a $160-million Pizza Pizza Royalty Income Fund initial public offering.
Pizza Pizza, wholly owned by founder Michael Overs, boasts 11.1-per-cent annual sales growth over the past decade. Last year, it sold $325-million of pizza from 500 outlets and the underwriters calculate that distributable cash would have been $14-million.
TD Securities and CIBC World Markets won the bakeoff to lead this deal, with Torys doing the company's legal work and Osler Hoskin & Harcourt on for the underwriters. BMO Nesbitt Burns had a credit relationship through a division with a strong market share in lending to franchisees, but didn't win the mandate.
The tension around this transaction will be over just how small a yield Pizza Pizza will have to pay investors for their support. Ten-year government bonds are offering 4-per-cent yields these days, so everyone is after extra income.
Recent small trust IPOs have come to market with yields in the 10- to 11.5-per-cent neighbourhood.
At the other end of the scale, quality large-capitalization trusts such as Yellow Pages Group feature yields in the 7-per-cent range. Boston Pizza Royalties Income Fund, the most successful restaurant trust of the half dozen now trading, pays a 6.9-per-cent yield.
The lower the yield, the higher the valuation that Mr. Overs receives for selling a large slice of the company he started with a single outlet, 38 years ago. Look for the dealers to bring Pizza Pizza to market with a yield that's less than 9 per cent, and for institutional investors to push for a more generous offering before they step up.