Selling group firms cut out of Enbridge Inc deal

Rumblings from Enbridge’s $2 billion equity financing – an offer that’s expected to be upsized by 15 per cent which closes Tuesday – continue.

One rumbling concerns the way in which the stock was allocated. With a cast of 17 firms, four more dealers were involved this time around compared with the company’s previous equity offering, a $460 million issue in mid-2014.

But there was no room for any selling group firms. Those firms, which don’t carry any of the risk that is assumed by the underwriting group, put orders in with respect to their customers (normally retail) with the expectation of having a so-called fill.

On this financing – announced at 4:42 p.m. last Wednesday C potential selling group firms received a phrase sheet at approximately 4:51 p.m. Three and a half hours later – a remarkably short period of time to sell such a great deal of stock – exactly the same firms received an email from syndication “that the financing is already closed and there is no selling group allocation.”

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Instead all the available stock was placed through the firms within the syndicate: allocations ranged from 16 percent for RBC and Credit Suisse to 0.5 percent for each of First Energy, Macquarie Capital Markets and Peters & Co.

“You put a purchase set for shares with respect to a customer and you are told that you get nothing. It’s deflating,” noted one broker. “Get exactly the same result several times consecutively and you start losing clients,” he added noting that while not having a selling group may go in the short term, it isn’t constructive from the long-term perspective.



The argument runs this way: over a cycle issuers need both large and small dealers to satisfy their needs. But to make sure that the little dealers remain once the big dealers decide they won’t be covering that segment from the market, they have to get area of the good deals. (A couple of years back, in another blow, the federal government of Ontario did away with selling group participation because of its bond offerings.)

And Enbridge was a good deal: the orders piled in (a lot more than 200 institutions participated); demand was strong as has been the after market performance: the shares are up by more that $6 from issue price. It might happen to be easy money for that smaller firms – though because it’s a classic zero-sum game, their revenue would have come in the cost of the underwriters.

This broker contrasted the Enbridge experience with what went down with the privatization of Hydro One in which the seller (Ontario government) insisted on broad retail participation – a goal which was partly achieved by including a group of selling group members. That edict was easy to implement because the offering was marketed – and not bought, where self interest necessitates shares be sold as quickly as possible.

Who gets what inside a deal is really a multi-part process. The overall allocation between firms – meaning the underwriting liability each dealer agrees to – is decided by the issuer with input from the lead managers or book-runners. Enbridge’s policy is: “We take care of people who take care of us.”

With input from the issuer, the split between institutional and retail will be determined, a determination that may change once all the orders have been received. Within an over-subscribed deal, the final allocation, which institutions get stock could be tense.

bcritchley@nationalpost.com