Launching an IPO seems risky inside a downturn, however the Ontario government’s decision to list 15 per cent of electrical utility Hydro One was embraced by the market like a stock that offered a slice of stability in uncertain times.
Despite retaining 85 per cent of the company, the Ontario government pledged to punch below its investment weight and allow the utility’s newly appointed management operate the company as if it had been a widely held commercial enterprise.
“It’s an asset that affects just about everyone in Ontario. You don’t have numerous IPOs you are able to say that about,” says Steven Smith, national co-chair of Osler, Hoskin & Harcourt LLP, legal adviser to Hydro One around the transaction. “For the province to stop a part of its ownership brought this into the privatization world. That makes it different from only a commercial IPO. It’s a landmark decision through the province to do that.”
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Ontario raised $1.66 billion from Hydro One’s initial public offering, among the largest ever in Canada.
“People do IPOs all the time. However this had unique challenges,” adds Sharon Geraghty, a partner with Torys LLP, legal adviser towards the province. “It does make doing a purely commercial deal look easier. You’re dealing with a lot of extremely important policy objectives. The government desired to make certain it worked.”
Torys and Osler come up with the agreements that will keep your province at arm’s length. IPO book runners Royal Bank of Canada and Bank of Quebec got the price right. And it all fell into place just as Canada’s energy and mining laden stock markets tanked. For investors, the opportunity couldn’t have come at a better time.
Two other Canadian power utilities had just gone public, Fortis Inc. and Emera Inc. They established benchmarks that made Hydro One easier to price. Meanwhile, the continued slide in oil and gas stocks, and weak equity markets generally, put investors inside a defensive mood. Power utilities were precisely what investors were looking for. Trends will come and go, but people will always switch on the lights.
“Obviously Hydro One would be a showcase deal,” says Kirby Gavelin, head of equity capital markets for Canada at RBC Capital Markets in Toronto.
“You’d a group of investors who were looking for downside protection, and the story certainly supported that,” he says.
“New issue opportunities like Hydro and Emera back in September couldn’t have come in a better time,” adds John McCartney, head of worldwide equity capital markets with Scotiabank Global Banking and Markets. “The power utility sector is really a stable, highly regulated well-run industry. These defensive attributes, along with consistent dividend growth, have led to superior relative shareholder returns over time.”
Behind the scenes, the move that made the deal work was getting the province to behave like a passive investor. Ed Clark, the previous TD bank boss introduced to advise the province, insisted on this. He delivered frank advice to the province, but he was equally frank with underwriters.
“He tested the rigour of our thinking and pushed us in a very constructive way,” Gavelin says.
The government has committed to reduce its holding to 40 percent in future secondary offerings. Though it still has a whopping 85 per cent from the company, it promises not to use that voting power.
“They’re serving as a 40 per cent investor from the first day,” Smith says. “They had a great eye on which the market would require.”
dhasselback@nationalpost.com
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