July 21, 2024

Opinion: Deals of the year: Companies offer big discounts to raise funds

Retailers wait until Boxing Day to slash prices.

Not investment banks. Dealers that raise the money Corporate Canada needs to pay for takeovers have been selling stock at bargain-basement prices all year long to get deals done.

Rising interest rates and economic uncertainty have upset what had been a sweet, decade-long run for Bay Street’s equity sales machine. From the global financial crisis to the COVID-19 pandemic, investors sank a significant portion of their savings into stocks. Their logic was that low-yielding bonds and cash were poor alternatives, and low-inflation growth seemed inevitable.

This year, it became far harder to get investors to commit money to equity offerings. They finally had attractive alternatives. Retail investors, for example, pulled money out of equity-focused funds – traditional buyers of new issues. They opted instead for money markets and fixed-income funds.

Rising interest rates made dividend plays such as utilities and telecoms as out of favour as skinny jeans. Yet these companies continued to make massive acquisitions, and needed cash to pay for takeovers.

How did the bankers respond? In an approach straight out of economics 101, they cut offering prices to stimulate demand. And the dealers took a hit on their own bottom lines if they didn’t offer large-enough discounts on bought deals – equity offerings that see the banks buy stock from a company and assume the risk of selling the shares to investors.

To understand the dynamics of this year’s market, look at how Enbridge Inc. raised the cash it needed in September to help fund a US$9.4-billion purchase of U.S. natural gas pipelines.

Enbridge and its bankers went into the deal knowing they had to give investors a reason to fall back in love with utilities. They decided to price $4-billion of stock – one of the largest bought deals ever attempted – at more than 7 per cent below its market price. That’s roughly twice the typical discount on a new stock issue.

The offering, led by RBC Capital Markets and Morgan Stanley, proved a hit. Enbridge ended up pulling in $4.6-billion. Since the offering, the stock is up by roughly 6 per cent.

Three months later, it was Pembina Pipelines Corp.’s turn to ask investors for cash. After spending $2.8-billion in December to buy full control of natural gas networks that link Alberta to the midwestern U.S., Pembina raised $1.1-billion in an equity offering led by TD Securities Inc., RBC Capital Markets and Scotiabank.

Again, the discount was more than 7 per cent. And again, investors stepped up. Pembina’s stock sale ended up being boosted to $1.28-billion. The stock price is also up by almost 6 per cent since the deal was done.

The same week, Rogers accepted an even wider 10-per-cent discount to the market price to move long-held stakes in Cogeco Inc. and subsidiary Cogeco Communications Inc. to the Caisse de dépôt et placement du Québec for $829-million, a deal underwritten by CIBC Capital Markets and UBS Securities.

Not every deal went well. In November, Crescent Point Energy spent $2.1-billion on nearby Hammerhead Energy Inc. The Calgary-based company opted to fund part of the deal by selling $500-million of stock to banks at 5.8 per cent below the market price. By traditional standards, that was a significant discount. But it wasn’t enough of a bargain to attract investors.

Crescent Point’s underwriters, led by BMO Capital Markets and RBC Capital Markets, ended up stuck with roughly 25 per cent of the stock they acquired. A few weeks after the original transaction, the banks needed to do a second share sale – known on the Street as a clean-up trade – to move the offering out the door. None of the banks made money on this outing.

Bay Street raised approximately $19-billion selling equity for domestic companies in 2023, on par with the previous year, and earned approximately $775-million for their work. Bankers and corporations accomplished this by offering the sort of discounts on new stock sales that lure shoppers back to big box stores on Dec. 26.

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