Sources told The Globe and Mail that Premier Kathleen Wynne is contemplating a sale of 10 to 15 per cent of the Crown corporation in an initial public offering that could be worth more than $1-billion, based on Hydro One’s estimated enterprise value of more than $15-billion.Tim Fraser/The Globe and Mail
Should the Ontario government sell a minority stake in utility Hydro One Inc., the offering would be among the most valuable to hit the public markets, and would likely rouse widespread investor interest.
Sources told The Globe and Mail that Premier Kathleen Wynne is contemplating a sale of 10 to 15 per cent of the Crown corporation in an initial public offering that could be worth more than $1-billion, based on Hydro One's estimated enterprise value of more than $15-billion.
That valuation would make the offering one of the country's largest. It could come close to Encana Corp.'s $1.54-billion spinoff of its royalty oil and gas business, PrairieSky Royalty Ltd., last year, which was the largest IPO in more than a decade.
Other chart toppers include resource giants Athabasca Oil Sands Corp., which raised $1.35-billion in 2010, and miner Franco-Nevada Corp.'s $1.26-billion IPO in 2007.
Hydro One manages the distribution network that transmits electricity created by a separate entity called Ontario Power Generation. Last year, former Toronto-Dominion Bank chief executive Ed Clark suggested selling some of Hydro One's local distribution systems, while keeping the larger electrical transmission grid publicly owned.
The asset is one of several prized possessions of the province, but a sale of a partial interest could provide much-needed funding for transit and infrastructure projects that have been promised by Ms. Wynne.
The government has been considering alternatives for Hydro One for years and it already shelved one IPO. In 2002, the province proposed a privatization scheme that would been worth about $5-billion.
At that time, Canadian and U.S. investment banks were scrambling for a piece of the deal, and the roughly $110-million in fees that such an offering would yield. In total, 18 different brokerage firms worked on that proposed IPO including BMO Nesbitt Burns, RBC Dominion Securities and Goldman Sachs, which listed its lead adviser as future Bank of Canada governor Mark Carney. The plan ran into stiff opposition and was scaled back to a sale of a minority stake before being scrapped altogether.
More than a decade later, a Hydro One IPO would likely be met by strong investor appetite from both the private and public market investors, and bankers would still be clamouring for a piece of the transaction.
Publicly-traded utilities in Canada are trading near 52-week highs and share prices for some have reached new all-time highs. Shares of St. John's-based gas and electricity distributor Fortis Inc. hit a new record high earlier this year, as did Halifax-headquartered Emera Inc., a power generation and distribution company. With interest rates wallowing at low levels, the utilities sector has been attractive to investors because of their dividend yield.
Institutional investors such as pension funds would likely love to own a piece of Hydro One, and a consortium of some of the country's largest funds tried to buy a minority stake in the past.
The public markets may also be attractive to the government in order to try to show that it got the best price possible. The other benefit of a public offering is the optics of selling the asset to the people of Canada, rather than an investment fund.
The public market has been seen as an attractive source of capital on recent deals, as evidenced by the acquisitions of U.S. assets by Canadian utilities, which then sought equity funding from public markets. One of the largest examples in recent years is Fortis's $4.3-billion (U.S.) purchase of UNS Energy Corp. in late 2013.
Investors will likely be looking for any restrictions the government might add that could put commercial constraints on the business. This could include a mandated location of the head office, number of employees and the rules on control of the company's assets. They will also be interested in the growth story that Hydro One is selling about how it will build its business in the future.