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Streetwise Hydro One offering: Bite-sized, or the full meal deal?

Power lines run out of the the Hydro One Claireville Transfer Station in Vaughan, Ontario Monday March 9, 2015.

Tim Fraser/The Globe and Mail

If Kathleen Wynne ultimately decides to take Hydro One public – and that's still a major 'if' – a move to sell just a small chunk of the utility would be a rarity in the history of Canadian privatizations.

Sources told the Globe and Mail Monday that the Ontario government is considering selling just 10 to 15 to per cent of the massive utility, which manages the distribution network that transmits the electricity created by Ontario Power Generation, a separate entity. The government could, however, follow up with additional stock sales.

The proposed IPO structure is markedly different from those of major privatizations from the past few decades. Some on Bay Street say the market has an appetite for a larger deal, and that the smaller stake is less appealing.

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In the 1980s and 1990s, when Canada privatized many of its Crown corporations, the government often favoured selling off large stakes at once. Many of this era's deals were knocked out in a punch or two. In 1995, federally-controlled Canadian National Railway Co. went public in a single IPO worth more than $2-billion – still one of the country's largest new issuances. Air Canada was sold off in two chunks, an initial public offering in 1988 and another in 1989.

At the provincial level, Potash Corporation of Saskatchewan went public in two offering in 1989 and 1991, raising more than $1.2-billion. And Alberta Government Telephones, which later joined BC Tel in a merger to form Telus in 1999, went much the same way. Suncor also went public in one fell swoop.

But those aren't the only comparable transactions, and investment bankers have surely pitched successful deals such as Petro-Canada, Cameco Corp. and Capital Power Corp. to Ms. Wynne as proof that small slivers can also be sold off.

Petro-Canada went public in multiple offerings starting with a nearly 20 per-cent block in the 1990s before Ottawa sold its final 19 per cent stake in 2004. The sale of uranium miner Cameco Corp. was a similar situation.

Capital Power Corp., a power generation company from Edmonton, was spun off from Epcor Utilities Inc. in 2009. It went public, raising about $500-million, and then followed up with subsequent offerings for the rest of the company.

Such deals will be more attractive to investors if, as in these cases, the sales are part of a longer term plan to privatize the whole entity. But in this market, there's a strong argument that investors will step up and buy Hydro One shares regardless. Infrastructure assets and utilities still have appeal in Canada, especially with resource prices in such rough waters.

Investors would still need to weigh the risks. Whether or not the government remains the major shareholder, it will still have full control over issues such as future rate hikes for customers. There's also the question of whether the government is in the best position to run the business effectively with an eye on returns, productivity and efficiency, including balancing boosting profits with the needs of unions – which are stacked with voters. Will the province shortchange shareholders' interests in order to pander to the electorate? What conditions will be put on the sale, and will they restrict management's ability to run the business effectively?

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Investors have looked past such restrictions before. In the case of CN, unprofitable branch lines and low margins prompted speculation that the offering would not be a success. Its IPO also prevented any single shareholder from buying more than a 15 per cent stake, and the company had to keep its head office in Montreal. Despite all the conditions, investors swooned and the deal proved to be so popular that the government increased the price and sold an extra provision of shares.

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