Gloria Nieto/The Globe and Mail
A volatile cocktail of choppy equity markets, skittish investor sentiment and plain old bad luck have contributed to a number of bought deal financings going awry in the past few weeks. Bankers have tens of millions of securities in inventory that they had planned to sell at a profit, but are stuck with – for the time being at least.
Investment banking syndicates led by National Bank Financial Inc. are sitting on at least two 'hung' deals. On Monday, after markets closed, Boralex Inc. announced its intentions to buy Enel Green Power France SASU for $400-million. At the same time, Boralex announced a bought deal financing of $110-million in subscription receipts, with National Bank Financial Inc. as the lead underwriter. Other banks in the syndicate are TD Securities Inc., Cormark Securities Inc., BMO Nesbitt Burns Inc., CIBC World Markets and Desjardins Securities Inc. As in any bought deal, the syndicate agreed to buy the securities, and planned to flip them for a tidy profit, which is typically done in a matter of hours after the deal is announced, with would-be buyers teed-up well ahead of time.
Shares in Boralex edged up to close at $13.42 a share on Monday. The bankers appear to have priced the Boralex bought deal fairly well at $13.05, leaving themselves some wiggle room to sell the shares at a profit. But according to sources, the stock sale did not go as planned, and underwriters were unable to move everything overnight. The shares lost ground on Tuesday and closed at $13, dipping below the bought deal price, where they have continued to trade since then.
"It's bleeding," said a source close to the deal, who said only about 50 percent of the securities had been sold as of Thursday night. While National is the lead, TD Securities, Cormark Securities Inc., BMO Nesbitt Burns Inc., CIBC World Markets and Desjardins Securities are also in the syndicate.
Earlier in the month, sources say that a National-led syndicate struggled with another bought deal. On Dec. 2 as part of GuestLogix Inc.'s plan to buy OpenJaw Technologies Ltd. it announced a bought deal financing arrangement with National Bank as lead underwriter in a $19-million subscription receipt and $20-million convertible debenture issue. The syndicate has so far been able to sell only about $1.5-million of the equity, and about half of the debt, according to multiple sources. Other brokers in the syndicate are CIBC World Markets Inc., Beacon Securities Limited, Canaccord Genuity Corp., Cormark Securities Inc., GMP Securities L.P. and Mackie Research Capital Corp.
While GuestLogix's shares have been volatile in the months leading up to the deal, things looked pretty good on paper. GuestLogix's share price closed on Dec. 2 at $1.04 a share, versus a bought deal price of $0.95 for the subscription receipts. But shares dropped sharply in early trading the day after the announcement, and sources say that bankers were unable to sell the millions of shares they had on their books. Over the next few trading sessions, GuestLogix's stock dipped below the bought deal price. The are currently languishing in the mid-80-cent range.
Of the seven analysts listed on Bloomberg that cover the stock, six rate GuestLogix a buy, with an average 12-month price target of $1.92 a share. One analyst, however, expressed reservations following the acquisition. Cantor Fitzgerald Canada analyst Justin Kew highlighed a number of "acquisition-related risks" in a note to clients on Dec. 4, including "limited cost synergies, significant integration risks and management distraction." Mr. Kew also placed his rating and target under review until the acquisition closes.
When asked to comment on whether the Boralex and GuestLogix deals were hung, a National Bank representative said that the bank could not comment on deals that are in distribution.
National Bank can take some financial comfort because it has additional funds coming in from ancillary investment bank advisory fees on the Boralex and GuestLogix deals, that others in both syndicates don't have. However according to a number of Bay Street sources, there is one other deal that a syndicate that includes National Bank is currently hung on.
While busted bought deals often leave a sour taste in the mouths of bankers, bought deals to fund mergers and acquisitions rarely derail the underlying deal from going through. Companies making the acquisitions, after all still stand to get the proceeds from the bought deal, when the financing closes, regardless of whether the syndicate took a bath on it.
"We were very satisfied with the acquisition and we are very confident that everything will go through." said Patricia Lemaire, director, public affairs and communications with Boralex in a phone interview, who would not comment directly on problems bankers have had selling the shares.
Dan Thompson, SVP, marketing and communications with GuestLogix Inc. in a phone interview said "We have absolutely no concern and are feeling great about both sides of the transaction."
Niall McGee