Two of the biggest initial public offerings of the year ran into trouble on the same day, with Whistler Blackcomb Holdings Inc. slashing its offer price and TransAxio Highway Concession Inc. cancelling outright, and for a change it's not a case of shaky markets. The culprit was aggressive pricing.
How did they go wrong? Read on.
TransAxio was seeking $900-million at $15 to $16 a share. Right from the get-go, some who examined the numbers said that would be a tough sell. The price valued the underlying asset -- a stake in the 407 toll highway in Toronto -- at a rich level, and investors in TransAxio were being asked to pay up while much of the value would go to SNC-Lavalin Group, which was sponsoring the deal.
On top of that, Canada Pension Plan Investment Board pushed hard against the deal, a source said. That's no surprise. CPPIB had a lot to gain.
Firstly, the pension fund would get the asset if TransAxio couldn't raise the money. CPPIB had put in a bid for the stake earlier this summer, and that triggered a right of first refusal held by SNC. SNC created TransAxio as a way to raise money to take advantage of the ROFR. With TransAxio out of the picture, the field would be clear for CPPIB.
CPPIB had a second reason to want to stop TransAxio. The pension plan is also bidding for an Australian company that also has a stake in the 407. That deal looked cheap in comparison to the TransAxio offering, so there was a chance that if TransAxio succeeded, CPPIB would also have trouble closing the Australian purchase.
To be sure, there was a strong case that the valuation on TransAxio was aggressive no matter what CPPIB said.
Under the terms of the deal, investors in TransAxio could end up paying as much as 30 per cent more for their highway stake than CPPIB had bid, as detailed by Streetwise in an earlier post. In the end, that kind of math made a deal tough to clear.
A person familiar with the transaction said enough investors probably would have been interested at $13 a share, where the economics were better for TransAxio buyers, but SNC didn't want to consider cutting its price until it was too late.
Similarly, in the case of Whistler and its planned $300-million IPO, the ultimate owners at Fortress Investment Group were "super aggressive" in pricing the first time around, said a person familiar with the transaction.
For a company with no growth and little diversification, the deal was priced with not enough yield to tempt investors.
The new pricing puts the IPO at $12.50 to $13 a share, with a yield on the stock of 7.5 per cent to 7.8 per cent. That's down from $14 to $15 with a yield of 6.5 per cent to 7 per cent.
Even there, it's not certain a deal will clear. There is said to be about $100-million of institutional demand, but retail demand is weak, said two sources.