Ontario's move to unload a $2.8-billion stake in Hydro One Ltd. has hit a standstill after investors balked at the stock sale, leaving underwriters with as much as half of the shares unsold.
The province's cash-strapped Liberal government announced the huge offering Monday, selling 120 million shares at $23.25 apiece to a syndicate of investment banks on a bought-deal basis. That means the shares were purchased up front by the underwriters in hopes of reselling them quickly to public investors.
But tepid investor demand for the issue means the underwriters, led by Royal Bank of Canada and Canadian Imperial Bank of Commerce, were holding as much as $1.4-billion worth of stock as of Thursday, according to people familiar with the situation.
Because such a large slice of the deal remains unsold, the underwriters will likely be forced to cut the already discounted offering to unload the rest. On Thursday, the stock closed at $23.08 in Toronto, down 4 per cent from Monday's close. CIBC declined comment. RBC did not reply to a request for comment.
Under the bought deal, the Ontario government received its funds up front. It's the underwriters who are liable for any unsold stock, and it is unusual for such a large portion to remain.
The weak appetite stands in stark contrast to a string of recent share sales in the oil patch that have sold briskly. TransCanada Corp., Cenovus Energy Inc. and others have issued equity to fund major acquisitions in hopes of cutting costs as oil prices languish, generating hefty fees for investment banks.
Hydro One is viewed differently. This is the third time Premier Kathleen Wynne's Liberals have unloaded shares, lowering the province's stake in the utility to 49.9 per cent.
Investor fatigue has set in following an initial public offering in November, 2015, and a subsequent sale in April, 2016 – which means this isn't a new story, such as a takeover, for investors to get excited about. Meanwhile, Hydro One lacks exposure to investors in the United States enjoyed by big energy firms, making it tougher to sell.
Last week, president and chief executive officer Mayo Schmidt said the utility saw potential opportunities tied to consolidation of Ontario power distributors.
He also cited "terrific opportunities" for partnerships in the U.S., without elaborating.
"We are also poised for growth in new markets where our deep scan over the past number of months has identified opportunities that we believe would be accretive on every measure," he told analysts on a conference call.
The bought deal announced Monday includes an over-allotment option for banks to sell as much as 12 million extra shares over 30 days.
The sale of Hydro One shares has been politically unpopular for Ms. Wynne, whose support has flagged ahead of an election next year, partly due to concerns over sky-high electricity prices.
Yet selling its stake in the Crown utility has netted the debt-saddled province nearly $9-billion so far, money the Liberals have earmarked for key infrastructure projects.
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