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Launching an IPO seems risky in a downturn, however the Ontario government’s decision to list 15 percent of electrical utility Hydro One was embraced through the market like a stock that offered a slice of stability in uncertain times.
Despite retaining 85 per cent from the company, the Ontario government pledged to punch below its investment weight and let the utility’s newly appointed management operate the organization as though it was a widely held commercial enterprise.
“It’s an asset that affects just about everyone in Ontario. You don’t have many 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 that province to stop a part of its ownership brought this into the privatization world. Which makes it not the same as just a commercial IPO. It’s a landmark decision through the province to achieve 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 constantly. However this had unique challenges,” adds Sharon Geraghty, a partner with Torys LLP, legal adviser towards the province. “It will make doing a purely commercial deal look easier. You’re handling a lot of very important policy objectives. The federal government wanted to make sure it worked.”
Torys and Osler put together the agreements that would keep your province at arm’s length. IPO book runners Royal Bank of Canada and Bank of Nova Scotia got the cost right. And it all fell into place just as Canada’s energy and mining laden stock markets tanked. For investors, the chance 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 simpler to price. Meanwhile, the continuing slide in gas and oil stocks, and weak equity markets in general, put investors inside a defensive mood. Power utilities were just what investors were hoping to find. Trends will come and go, but individuals 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 searching 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 global equity capital markets with Scotiabank Global Banking and Markets. “The ability utility sector is 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 some thing like a passive investor. Ed Clark, the former TD bank boss brought in to advise the province, insisted about this. He delivered frank advice towards the province, but he was equally frank with underwriters.
“He tested the rigour of our thinking and pushed us in an exceedingly constructive way,” Gavelin says.
The government has committed to reduce its holding to 40 per cent in future secondary offerings. Though it still has an astonishing 85 per cent of the company, it promises not to use that voting power.
“They’re acting as a 40 per cent investor from day one,” Smith says. “They’d a good eye on which the marketplace was going to require.”
dhasselback@nationalpost.com
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