BCE’s $750-million financing largely sold to retail investors

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The underwriters behind BCE Inc.'s surprising bought deal took a risk selling $750-million worth of new shares at such a tight discount. Lucky for them, retail investors are stepping up to support the deal.

Hardly anyone, not even some underwriters, expected a common share financing from the Canadian telecommunications giant – let alone such a large one. The last time BCE issued shares was 2002. Add to that the deal's tight 1.6-per-cent discount and the degree of surprise only climbed higher.

But BCE and its lead underwriters were willing to bet that non-resource, high-yield investments are in heavy demand, with retail investors particularly keen. Roughly one-third of the order book has been filled by institutional investors, and the rest is going to retail buyers, according to someone familiar with the deal.

That isn't too surprising. Retail investors make up about half of BCE's shareholder base, which means they would be big buyers even if the deal was simply allocated based on existing support. However, the smaller portion of institutional buyers in the new financing raises a few questions as to whether the more sophisticated buyers were a little gun-shy to invest at such a rich price – especially now that BCE's shares are trading around $56.75, a little below the $57.10 new issue price.

BCE took a risk by settling on such a tight discount – anything below 2 per cent is considered aggressive. Because the telecom giant generates solid cash flow, there doesn't seem any obvious reason for it to tap the markets for fresh funds right now. By issuing new shares, it was rather clear the company was taking advantage of its hot stock price, which set a record high in October.

The same tactic backfired for DHX Media this summer, when its stock was soaring. The company tried to sell 8.7 million shares through a marketed offering, hoping to raise $76-million to help pay back some debt, but quickly changed its mind after concluding "current market conditions are not conducive for an offering on terms that would be in the best interests of DHX's shareholders."

BCE launched its deal largely for the same reason – to help repay debt – but it took a risk by launching a bought deal that can't be cancelled. Though this structure meant it got the full $750-million up front, making the underwriters liable for any unsold stock, an unsuccessful deal would weigh on its stock for some time

BMO Nesbitt Burns and RBC Dominion Securities co-led the offering, and their connections to BCE might have something to do with accepting such a tight discount. BCE chief executive officer George Cope sits on BMO's board, and former RBC CEO Gord Nixon is on BCE's board. Awarding the lead underwriter labels to anyone else might have raised some eyebrows, because investment banks are expected to step up and support top clients.