The Ontario government could stand to receive half a billion dollars from a planned initial public offering next month of the province's electronic land registry system, but it is hardly alone in preparing for a major windfall.
Fifteen officials at Teranet Inc. are in line for a $90-million payout as the company winds up its long-term incentive plan in anticipation of its much-awaited IPO, according to a prospectus filed with regulators yesterday. That is on top of an additional $77-million in accumulated incentive payments made to management in fiscal 2005. Then, of course, there are the untold millions of dollars in profit that will be pocketed by several large investors who took stakes in the monopoly registration system in 1993.
Teranet did not disclose the size of the proposed IPO in its prospectus, but sources close to the deal suggested it will be approximately $700-million, making it one of the largest business trust IPOs on the Toronto Stock Exchange. The sources added that the expected yield of the company will be set between 7 and 8 per cent, which implies the entire company would be worth around $2-billion.
"They've done a great job of running the company, but the executive's employment contracts were something that the government was always very sensitive about revealing," said one financier who was working on the IPO.
These officials, including chief executive officer Aristides Kaplanis, will shift to a pay scheme typical of income trusts, with a bonus that is tied to increasing the amount of cash distributed to unitholders.
Teranet was founded in 1991, and was originally a partnership between the province and the private sector. But in 2003, Ontario's former Conservative government sold its stake for $370-million to Teramira Holdings Inc., a private fund headed by Montreal venture capitalist Eric Baker and backed by dozens of large institutional investors and pension funds.
As part of that deal, the government was guaranteed half of any additional money Teramira collected if it ever sold the company. Even though the government relinquished its ownership position, it still effectively controls Teranet through its ability to regulate fees and veto ownership changes.
Assessing the precise value of the government's potential Teranet inheritance is complicated, but if you assume Teranet is worth about $2-billion, the province's stake would be valued at about $538-million. It has agreed to contribute $54-million toward the improvement of Teranet's operations.
"The $400-million is a conservative estimate, but at this time we can't comment further," said Diane Flanagan, a spokeswoman for the province. "At the end of the day, the value could be determined by the markets."
One of the key questions surrounding the pricing of the Teranet IPO was whether the company would be able to raise fees for its services. However, Dalton McGuinty's Liberal government said it will retain complete control over so-called statutory fees, which account for about three-quarters of Teranet's $225-million in revenue last year.
With a monopoly on the paperwork that goes with the sale of homes, commercial buildings and offices, Teranet charges fees that can range from $18 for an electronic search to $70 to register a document such as a mortgage. According to its prospectus, the company had adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $155.1-million in the 12 months ended Dec. 31, 2005 -- a figure that excludes the tens of millions of dollars worth of long-term incentive payouts to management.
Of this, it expects about $116-million is the amount it would distribute to unitholders in the trust. Bankers will begin marketing the Teranet Income Fund in about 10 days, and if all goes smoothly, the IPO will occur in the next five or six weeks.
RBC Dominion Securities and CIBC World Markets are co-leading the IPO for Teranet. Genuity Capital Markets, meanwhile, served as adviser to the government.