Canada has long enjoyed a dubious distinction in capital markets. This is one of the most expensive places in the world for a company to raise money by selling stock.
Royal Dutch Shell PLC took a sledgehammer to that convention this week, paying rock-bottom fees to its banks as it sold a $4.3-billion stake in Canadian Natural Resources Ltd.
For corporate Canada, this landmark stock sale involving one of the country’s largest energy companies marked the latest, loudest signal that the tight-knit investment banking community is finally cutting prices to win work. This is nothing but good news for public companies; every chief financial officer should push banks for better terms the next time they raise capital.
In Bay Street circles, the Canadian Natural transaction demonstrated the banks must be willing to take on more risk, for far less reward, if they want to win roles in major deals. That’s a chilling development for investment bankers.
To put what Shell did last week into perspective, imagine being able to tap any generic ATM, any time, and pay less than 50 cents for the withdrawal rather than the standard $3 fee you pay when it’s not your bank’s machine. Shell won concessions on fees by injecting old-fashioned competition into the investment banking world. The Anglo-Dutch oil company asked the largest domestic and foreign-owned dealers to come up with their best offer on the 98 million Canadian Natural shares it acquired over a year ago as partial payment for Athabasca oil sands projects.
Not too long ago, this sort of share sale came with a standard 4-per-cent underwriting commission. Canadian dealers were remarkably disciplined in holding the line on fees, even as commissions tumbled in European and U.S. markets.
To win Shell’s business, the banks threw standards out the window. Four dealers – Goldman Sachs & Co., RBC Dominion Securities, Scotiabank and TD Securities – eventually agreed to pay the oil company US$33.90 for each Canadian Natural share, then resold it to investors for US$34.10 per share. The banks earned 20 cents a share on the transaction – rather than a 4-per-cent fee, they did the deal for a 0.58-per-cent commission.
At least one major bank opted out of the Canadian Natural sale on concerns that the risks didn’t match the potential payout, according to investment bankers who worked on the deal. But one Canadian player – Scotiabank – choose to jump in when Shell offered the opportunity, taking advantage of strong long-term ties to the oil company that included the right to be part of any Canadian Natural share sale.
There were elements of the Shell transaction that paved the way for the banks to race to the bottom when it came to fees. This was a block trade of stock, done with minimal regulatory fuss. So even though the Canadian Natural share sale was massive – it ranks among the three largest equity transactions ever seen in this country – it was exactly the type of trade the banks built global sales networks to accommodate.
The larger lesson of the Shell share sale is the cutthroat competition that dominates U.S. equity markets is now prevalent in Canada. Consider that two years ago, Credit Suisse Securities Canada Inc. and JPMorgan Chase & Co. shocked Bay Street by helping Encana Corp., another large energy company, raise US$1-billion with a share sale that also resembled a block trade of stock, done for a 1.8-per-cent fee. Now we’re seeing far larger transactions done for a third of that commission.
For Canadian companies, the trend is now a friend on stock sales, as fees keep falling. Looking back, the Canadian Natural deal follows on $2.8-billion share sale at Hydro One Ltd. last May that paid the Street just 2-per-cent commissions, and a $1.5-billion share sale by Enbridge Inc. in November that carried no fees at all - the utility sold directly to three institutional investors, saving roughly $60-million.
For investment dealers, the days of fat fees are now in the past. To win big deals, banks must compete on commissions and shoulder more risk. At Canadian Natural, that all worked out well. The company’s shares rallied in step with rising oil prices after the transaction was announced. But as the Street puts more of its own capital on the line, for skinnier fees, it’s inevitable that not every deal will have a happy ending.