Investment bankers spiced up the finance menu last year by serving up a made-in-America dish for Canadian companies that want to raise money by selling stock.
Two successful equity sales – one from Encana Corp. and the other from an investor in Canadian Pacific Railway Ltd. – were done using what's known as a "block trade" approach created by U.S. investment banks. In this type of offering, the fees banks receive depend on the final price the shares sell for.
These offerings marked the first time the structure had been used with large Canadian stock sales – both deals were worth more than $1-billion – though it is relatively common in U.S. markets.
After two well-received offerings, will the country's largest companies embrace the new U.S. approach as an alternative to conventional, Canadian-made bought deals? If corporate Canada does jump on board, it would represent a very real threat to the domestic investment bank's lucrative stranglehold on equity financing.
The U.S. approach to stock sales is saddled with a cumbersome formal name; it's called the "block trade net pricing model." JPMorgan Chase & Co. and Credit Suisse Group AG used the structure last year to sell $1.15-billion (U.S.) of stock for Encana Corp. and $1.45-billion of Canadian Pacific shares for hedge fund Pershing Square Capital Management. Two Canadian dealers – CIBC World Markets and TD Securities – also played roles in the Encana share sale.
These two deals catapulted JPMorgan and Credit Suisse into the top ranks of Canadian investment banks when it came to equity financings. Thomson Reuters data show the pair were the only two-foreign-owned houses to crack a list of the top 10 sellers of stock for Canadian companies, ranked at No. 7 and No 8 respectively. TD Securities placed first on that list, followed by the other five Canadian bank-owned dealers.
From the outside, fees are the major difference between the traditional Canadian way to sell stock – the bought deal – and the new U.S. structure. In a bought deal, the investment banks receive a 4-per-cent commission; banks have held the line on these fees for decades. On the Encana transaction, the banker's fee worked out to 1.8 per cent.
There's another, more subtle variation between the two approaches that is likely to have a larger impact on the success or failure of the U.S. block trade structure.
JPMorgan and Credit Suisse sold Encana on a U.S.-style deal last September in part because the two banks said it would grab the attention of investors south of the border, and allow the Calgary-based energy company to expand its U.S. investor base.
Encana's fortunes are tied in large part to production from recently acquired oil fields in Texas – familiar ground to American investors – and company management has been pitching the potential of its holdings to U.S. institutions over the past year. The campaign has been successful – eight of Encana's 10 largest shareholders are U.S. fund managers. If the JPMorgan- and Credit Suisse-led equity offering built off that base, then Encana achieved a key corporate goal.
In the wake of the successful share sale, which was bumped up in size by $150-million after being announced, a spokesman for Encana said the company weighed the merits of various approaches to selling stock and decided that the block trade approach "offered the best value for our shareholders." The view from JPMorgan and Credit Suisse is that this equity offering brought new U.S. institutional investors into the stock.
Rival dealers in Canada point to the spike in trading of Encana shares following the offering as evidence that hedge funds, rather than long-term investors, were major buyers. Canadian-owned investment banks also point out they have deep ties to U.S. institutions, and make every effort to sell Canadian shares to these clients on a daily basis.
The U.S. equity market is the deepest and most liquid in the world. For domestic companies with growth plans that will be financed with equity offerings, expanding their investor base outside Canada is akin to the search for the Holy Grail: an elusive but compelling quest.
If a made-in-America approach to selling shares results in a larger U.S. investor following for Canadian companies, and lower fees, it's going to enjoy a prominent role in the domestic market.