Everyone knows a brand name has value on a store shelf. Looking for peanut butter? Reach for Kraft, the smooth kind. And jam? It's got to be E.D. Smith.
It has now become clear that a strong brand can also sell an income trust. CanWest Global Communications is about to test just how much a household name can add to the bottom line.
Last week, CanWest launched the $620-million initial public offering of its newspaper division. Many of the folks being pitched this offering already get the company's product on their doorsteps each morning. The trust represents a 28-per-cent stake in several dominant major daily papers, from Montreal to Ottawa, Edmonton, Calgary and Vancouver.
For a stockbroker, a familiar business such as newspapers is far easier to sell to the average investor than the a market leader in sodium chlorate. (That was the Canexus Income Fund.) Veteran financiers figure a well-known consumer brand likely translates into a 100- to 150-basis-point reduction in the promised yield on a trust. Keep in mind, there are 100 basis points in a percentage point.
What does this finance mumbo-jumbo actually mean to CanWest? About $400-million, one way or another.
At the moment, dealers are marketing the CanWest trust with a proposed yield of between 8 and 8.5 per cent. Scotia Capital and RBC Dominion Securities are leading the offering.
That yield is halfway between the 10-per-cent distributions paid by two small newspapers trusts -- Osprey Media and FP Newspapers -- and the 6-per-cent yield sported by Yellow Pages, arguably the country's highest-quality units.
If CanWest had to offer a high yield to entice investors, say 9.5 per cent, analyst Robert Bek at CIBC World Markets ballparks the value of the whole trust at just more than $2-billion. At the other extreme, if the CanWest IPO can be flogged with a thin 8-per-cent yield, then the resulting trust is worth $2.5-billion to its parent.
Debt-heavy CanWest and the dealers are hoping for a deal dynamic similar to what played out in the spring, when ACE Aviation spun off a chunk of its Aeroplan loyalty program. That IPO also had RBC Dominion as a lead underwriter.
Just about every investor in the country is an Aeroplan member. The dealers started marketing this familiar (and often frustrating) service with a forecast yield of between 7.5 and 8.5 per cent. As demand built up, the dealers were able to ratchet down the yield, eventually pricing the $250-million IPO with the promise of a measly 7-per-cent distribution. Similar circumstances played out around trust IPOs for jam maker E.D. Smith and the Pizza Pizza chain.
However, CanWest can't possibly be as easy to move as these other trusts, by virtue of its size. With the notable exception of the Yellow Page's $1-billion debut, this $610-million offering is the biggest trust IPO attempted in the past five years.
CanWest is going to need far more than retail investor support. This IPO requires massive institutional support, which means winning over hard-hearted fund managers. Success also means convincing mutual fund types to punt existing media holdings --Torstar or CHUM or Corus -- and buy this trust. And the sellers need to win over that special class of professional -- hedge funds and many stockbrokers' personal accounts -- who buy IPOs to flip 'em. Aeroplan jumped 18 per cent in its first day of trading, in heavy volumes.
CanWest will almost certainly give birth to a successful trust. But this is going to be one big baby, and everyone involved wants to see a smooth delivery, as the parent company is likely to come back to the market and sell more units. Much as it may pain CanWest executives, a generous yield in the 8.5- to 9-per-cent range is in their best long-term interests.
AIC cuts performance fee
One of the more frequent observations on hedge funds is they represent an evolution in compensation, rather than investing.
It's a fair statement. With performance-based fees that typically run to 20 per cent, hedge funds offer more upside than any conventional asset manager. These fees make the hedge funds home to some of the highest-paid individuals on the planet.
Against this backdrop, mutual fund manager AIC did something quite remarkable yesterday. The fund dropped its portion of the performance fee on a retail hedge fund offering, the AIC American Focused Plus Fund.
The four-year-old hedge fund, run by James Cole, collects a 2-per-cent annual management fee, and a 20-per-cent performance fee that was split between AIC and the financial adviser who sold the fund. Effective yesterday, AIC dropped its half of the fee. The advisers stop getting their slice in 2006, all of which means better returns for investors.
AIC, which has been losing assets of late, has thrown down a gauntlet. Canadian fund managers have traditionally been reluctant to slug it out over fees. It will be interesting to see if other fund managers choose to compete by cutting performance levies on their own hedge fund offerings.
Andrew Willis