Even after orchestrating a wildly successful initial public offering, Hydro One's top advisers were given no guarantee they would co-lead the next share sale. To nab the prestigious spots again, Royal Bank of Canada and Bank of Nova Scotia would have to fight for them.
That, or get creative. On Tuesday, they did a little more of the latter.
After markets closed, Hydro One announced a $1.7-billion secondary offering, allowing the Ontario government to sell another 15-per-cent stake to public investors. If demand from buyers is heavy again, like it was for the IPO, as much as $2-billion worth of new shares will be up for grabs.
While Bay Street widely expected a deal because Hydro One's shares were trading nearly 20 per cent over their IPO price, few people expected one before May, when the IPO's lockup provision expired. Lockups prevent existing shareholders from dumping more shares into the market before a preset date, and they are commonly used in IPOs to prevent existing owners from selling shares quickly after share price increases.
However, the underwriters had the power to scrap this provision by giving their blessings to a new deal. RBC and Scotiabank took advantage of this right by pre-emptively bidding to handle the sale with rather favourable terms.
First there is the price. Hydro One's latest offering was sold at a 2.1-per-cent discount to the utility's closing value; billion-dollar share sales are often priced at bigger gaps to market prices to give investors a greater incentive to buy. Enbridge's $2.3-billion offering in February, for example, came at a 5.7-per-cent discount, while TransCanada Corp.'s mammoth $4.4-billion share sale in March – the largest in Canadian history – was priced at a 7.4-per-cent discount.
RBC and Scotiabank also pitched lower-than-normal underwriting fees. Big bought deals typically pay commissions amounting to 3.5 per cent to 4 per cent of the total offering; Hydro One's latest has the same terms as the IPO – 1 per cent for sales to institutional investors, 3 per cent for sales to retail buyers. That's rare for a bought deal, because unlike the IPO, now the banks are on the hook for any unsold shares, dramatically increasing their risk.
The fees are also capped at a blended average of 2 per cent, or $34-million of the $1.7-billion deal. There is an expectation that more shares will get sold to retail investors this time around, and as of early Wednesday, that assumption has proved to be correct. The underwriters are still trying to sell all of the shares, which is common for a deal of this size, but most sales have been to retail investors, according to someone familiar with the deal.
"When someone comes and offers you that, you hit the bid," explained Ed Clark, former Toronto-Dominion Bank chief executive officer who has handled the Hydro One file for the Ontario government. "It was a smart business move by the two leads."
He also insisted the co-lead advisers weren't given any special standing based on ties to the Wynne government. It was recently revealed that a former Scotiabank vice-chairman held a fundraiser for the party, and cited Hydro One's IPO in an e-mail inviting people to attend. To prevent any conflicts, the government had already set up a special committee headed by Mr. Clark, which serves as a quasi-independent board for any Hydro One dealings.
Although the pre-emptive bid forced the utility to act sooner than it originally planned – and forced Mr. Clark into action despite suffering from a recent bout of shingles – no one was totally caught off guard by the timing. "We're all old geezers," he joked of his committee. "We've all seen this." With the utility's stock up roughly $1 in the past month, "they were going to be tempted at these prices, and they offered us a very good deal."
While RBC and Scotiabank absorbed any risk that the deal wouldn't sell, they had good reason to suspect there would be decent demand. Utility-type offerings have been incredibly hot, and investors have been pleasantly surprised with quick gains. Anyone who bought into Enbridge's offering is up 20 per cent on their purchase; buyers in TransCanada's offering are already up 7 per cent.
After Tuesday's sale, any future Hydro One share sales will be jump ball – meaning any banks have the potential to grab the prestigious co-lead titles.