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Streetwise

Banks court trouble with tight stock discounts Add to ...

Investment bankers are clearly either feeling brave or desperate.

With competition for deals fierce in a slow market, bankers are pitching very aggressive prices to companies looking to sell stock -- raising the question of whether issuers are always right to take top dollar.

Fortis Inc. announced a $600-million stock sale Monday night at a price not even 2 per cent lower than where Fortis stock was trading Monday. Tuesday, the stock has been stuck persistently just below the sale price, suggesting the transaction was not the hottest seller for the lead underwriters at CIBC, Scotia Capital and TD Securities.

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That followed a $400-million transaction by Enbridge Inc. earlier in May that was priced at an even tighter spread, and which ended up going mostly unsold.

Of course, when investors don’t bite on such offerings, the company doesn’t take the upfront losses thanks to Canada’s system of bought deals.

The lead underwriters of the bought deal (TD in the Enbridge case) set the price, and the banks in the syndicate buy the stock at that level and take the risk of reselling it at a profitable level.

So for a company, is the obvious answer to always take the maximum bid from whichever bank is feeling the most aggressive?

Not necessarily. It’s a fine balance. The company naturally wants to minimize dilution, and that means getting the maximum price per share. Sell too cheaply on a secondary offering and you can upset investors in your company, who feel you’re giving away value. But a deal that’s priced too aggressively and doesn’t sell well can also create a millstone weight on a company’s stock until the deal is cleaned up, which is also something investors don’t like to see.

As many issuers have found out over the years (we’re looking at you, Facebook) taking the top bid from the most optimistic investment bank is not always the absolute right call.

 
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