Wednesday, 19 June 2019

Canada Capital Markets Issue: Hydro One's C$1.83bn IPO

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Privatisations are rarely uncontroversial and the sale of a power distribution company serving 1.4m residents of rural Ontario was never going to be an exception.

Yet Ontario Premier Kathleen Wynne championed the sale of the utility in March, picking up plans that had been abandoned by prior administrations. The privatisation was to be the centrepiece of an infrastructure development programme totalling expenditure of C$29bn.

The sale by the Province of Ontario of 15% of Hydro One through a C$1.83bn IPO was a remarkably smooth – almost fuss-free – process, providing valuable political cover for all constituencies.

Royal Bank of Canada and Bank of Nova Scotia were selected in June to lead the IPO. A first job was to ensure a quality board was appointed.

Former RBC board member David Denison was in place as chairman, but that was it. Michael Vels signed on as CFO on July 1 and Mayo Schmidt as CEO in September.

Marketing and execution of the IPO was efficient, considering management had barely had time to learn their way around the office.

“There was a lot of work done to get to a point where we could conduct a transaction of excellence,” recalled Vels. “I made the decision that we not only needed to focus on improving the existing business but delineating a growth strategy that would unlock the business from a government-controlled entity. How would we drive acquisitions, operational improvements?”

The banks kicked off a 12-day roadshow in mid-October with institutional meetings across the US and Canada and conference calls to reach international investors – in total, there were 79 one-on-one investor meetings, 16 through calls; nine institutional group events; and two group calls.

Retail, an important constituency targeted for 25%–30%, was educated through four group events.

Final pricing of 81.1m shares was set on October 29 at C$20.50, in the upper half of the C$19–$21 indicative range. Pricing set the initial dividend yield at 4.1% and valued the business at C$12.2bn. Exercise of the 10% greenshoe in full took the deal up to C$1.83bn and left the state’s holding at 85%.

A core part of the allocation strategy was to hand 45% of the institutional pot to just 10 institutions.

“We wanted core anchor accounts to have a quantum of stock to make them interested and also motivate them to buy in the aftermarket,” said RBC head of ECM Kirby Gavelin. “There were significant cutbacks; in some cases to as little as 35% of what they had put in for.”

Hydro One closed its debut in early November at C$21.62, some 5.5% above offer – a Goldilocks scenario that showed no excess value was left on the table.

Capital markets rigour accomplished the stated task. Continued execution of business initiatives will allow the government to achieve its funding objectives by selling down its residual stake in Hydro One to 40% by 2018.

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