Ontario played hardball with bankers over fees for Hydro One IPO

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Ontario did not negotiate with bankers on fees for the upcoming 15-per-cent share sale of Hydro One Inc. A source close to the initial public offering told The Globe and Mail the province insisted on a rock-bottom fee schedule with underwriters and gave them a take-it-or-leave-it offer.

"We were absolutely clear. This is the fee structure that we're offering and we will not pay one dollar more," the source said. "No one balked."

In June, Hydro One announced that underwriters will receive a 1-per-cent fee for placing stock with institutional investors. Shares that end up in retail hands will earn a 3-per-cent commission. The normal fee structure for Canadian IPOs typically runs between 5 and 6 per cent. The government had telegraphed that it would drive a hard bargain with underwriters. Ed Clark, the former Toronto-Dominion Bank chief executive who is working with the Ontario government on the share sale, said in April that Bay Street "will see a fee structure that the industry has never seen before," but how low the government would go and how much leverage it actually had over underwriters was unknown.

For the lead positions, Hydro One accepted submissions from the brokerage arms of the Big Six Canadian banks, Goldman Sachs Group Inc. and Barclays PLC. Bankers submitted proposals knowing they would have to live with the low fee structure. Scotia Capital Inc. and RBC Dominion Securities Inc. were selected as the lead underwriters.

One reason underwriters were willing to be lowballed is the prestige of leading a marquee IPO. The partial privatization, which is expected to fetch about $2.25-billion, is on track to be the biggest Canadian stock sale in about 15 years. The biggest share sale of the year so far is Acasta Enterprises Inc., a shell company that raised just over $400-million.

The Hydro One stock will ultimately be sold by a much bigger syndicate of underwriters, but other members have not yet been named. It is common for large IPOs to have big syndicates. Shred-it International Inc., which later pulled its $600-million IPO in favour of a buyout, had 11 banks on its syndicate.

The Ontario government has said it expects the first tranche of Hydro One to hit the market in the fall or winter. The source said the province will be sensitive to market conditions and will not pull the trigger until the environment is right. The IPO market is subject to constant change, with sentiment often shifting in a flash. At the beginning of 2015, the market was moribund. But in the second quarter, after stock sales including Cara Operations Ltd. and Shopify Inc. went gangbusters, the market ignited. Since then, investors have largely lapped up offerings and bid up shares in the aftermarket from a diverse collection of non-resource companies, and a handful of special-purpose acquisition companies (SPACs), which are shell companies with no inherent operations yet. A few have missed though, including Mogo Finance Technology Inc. and Sleep Country Canada Holdings Inc., whose share prices stumbled post-IPO.

Investors will have a better idea on the timing of the Hydro One IPO once the preliminary prospectus is filed. Usually, a prospectus is filed a few months before the date of going public. The government has signalled its intention eventually to sell 60 per cent of its holdings over time. If and when the government does future stock sales, underwriters will be back at the table, duking it out again for the right to lead those offerings.