In a year when new shares in successful initial public offerings have jumped 20 per cent or more when they hit the market, Hydro One's small rise could be called underwhelming. It would be a mistake to think that way.
Even though Canadian companies such as Cara Operations and Shopify saw stellar returns on their first days of trading, Hydro One's 5.5-per-cent gain Thursday came in a much different market. Six months ago, investors were desperate to get their hands on any new non-resource stocks; ever since August's wild swings, they often have to be convinced they won't get burned.
Considering how much investor sentiments have changed, Hydro One's rise to $21.60 is a relief more than anything. The small gain should help any investors who sat on the sidelines during the IPO gauge the company's value – had it soared on the first day of trading, it would be difficult to determine how many people were buying purely on momentum and not as long-term holds.
Because 30 million Hydro One shares were bought and sold Thursday, bankers say it is safe to assume many investors who bought IPO shares solely for a quick profit have traded out of their position.
In many ways, a positive first day of trading should have been expected. The order book was multiple times oversubscribed, according to people familiar with the deal, and some banks saw extremely heavy demand from retail investors.
But the marketing process came with a lot of uncertainty and secrecy so it was tough to ascertain how investors felt about the deal. The order book was built in a very private fashion and until the deal was priced at $20.50 a week ago, the co-lead underwriters kept any information about total demand secret – even from other banks that were helping underwrite the deal. Now that the shares are openly traded, there are no more secrets and investors have a public mark on the share price.
The public discourse surrounding the IPO was also overwhelming negative leading up to the first day of trading, colouring anyone's expectations. The provincial Opposition party, for one, asserted that the deal is the "worst in the province's history."
Even more confusing, on the very same day that Hydro One priced its shares, the independent Ontario watchdog who reviewed the sale concluded that the deal will add to the province's debt load in the long run – despite hard evidence in his full report that proved it is far too early to make such statements. The deal's negative political perception didn't make it easy for investors to get excited about the company.
Whether the deal will be successful in the long run is still way too tough for anyone to call. It will be up to management to prove it can deliver stability, with some prospects for growth, in coming quarters. But a slow and steady start for the shares can only be a good thing.