As Thomas Weisel Partners now knows, it's the small deals that often end up taking a bite out of the dealers.
Thomas Weisel is the unhappy owner of a $25-million bought deal done in mid-July for a junior natural gas play, Stetson Oil & Gas. The underwriting was done at 55 cents a share when the stock was trading at 60 cents. Unfortunately for the dealer, gas prices were falling just as Thomas Weisel started marketing, and clients didn't show much interest in wearing new Stetson positions. The stock sold off, leaving company and client with a problem.
With Stetson closing Friday at 38 cents a share on the TSX Venture Exchange, Thomas Weisel is pregnant with a $6-million loss on this junior gas financing. The San Francisco-based dealer has a $228-million market cap, and arrived in Canada by taking over Westwind Partners last year.
There's nothing terribly new about a dealer getting stuck with all or part of a bought deal, which sees the brokerage house buy stock or bonds from the company and assume the risk of selling the securities, rather than simply serve as an agent. In fact, the Stetson transaction is a reminder of the pitfalls on these financings.
Thomas Weisel won this mandate after competing with other dealers. One of the factors in getting the business was a decision to go it alone, rather than sharing the risk by making the underwriting conditional on syndicating or splitting the offering with other houses.
This was always going to be a difficult transaction, as Stetson is a tiny company, with a market cap of just $9-million, that planned to use the $25-million in new capital to pay for properties in North Dakota that are part of the promising Bakken gas play.
Stetson is still on the hook for that payment, which brings us to what may happen next.
Closing on the financing was supposed to take place on July 31, but Stetson and Thomas Weisel have agreed to delay proceeds as they try to work out some sort of comprise, which likely means trying again at a lower price. There's also the potential for duelling lawyers, as the dealer and the oil company try to figure out who will pay what, but taking this problem to court doesn't help Stetson pay for the land it bought. Rival dealers are circling, pitching their own idea on the structure of a new financing, should the July financing fall apart.
Now, anyone who has been around the Street recalls the one big financing that marks the worst bought deal ever seen in the Canadian community, the disastrous 1987 British Petroleum underwriting that neatly coincided with the market's crash. That was a life-altering event for folks at the employee-owned dealers involved.
But most bought deals that run into trouble involve smaller, thinly traded companies. The red ink for these deals doesn't get as much attention as the $50-million-plus hit on the BP fiasco, but the losses sure sting.
A syndicate of four dealers led by RBC Dominion felt at least $1.5-million of pain on a $49-million financing in June for Points International. And back in May, windmill maker AAER Inc. slashed the price of a planned $7-million bought deal following a devastating setback in bidding on Hydro-Québec power projects, which helped Canaccord Capital and National Bank Financial steer clear of a nasty pothole.
