In a typical year, there might be one or two common share offerings in Canada that exceed $1 billion. In 2016, there were eight, and five of them were in a single sector: oil and gas.
“There were a disproportionate number of large deals last year,” said Sandro Morassutti, managing director of equity capital markets at CIBC Capital Markets. “There didn’t seem to be a shortage of liquidity for companies in that category that were looking to grow or raise money to fix the balance sheet.”
So what made 2016 the year for mega-sized common share deals? Uncertainty had been a big theme in the energy sector since oil prices started to drop in the summer of 2014. By early 2016, there was a sense the energy business had hit bottom and the Canadian economy was turning the corner. That brought a lot of global institutional capital back to the Canadian marketplace. The big Canadian energy firms offered a compelling mix of yield and potential growth.
“At a macro level, 2016 was a year in which a lot of global fund managers refocused on Canada. We saw a lot of money coming back into the Canadian market,” says Derek Neldner, head of Canadian investment banking at RBC Capital Markets. “We saw a better outlook on commodities, and an improving view on the outlook for the Canadian economy and the Canadian dollar.”
The ball started rolling in February. Enbridge raised $2.3 billion in a deal announced at the end of the month. While Enbridge would later in the year announce a colossal $37-billion merger with Spectra Energy Corp., that wouldn’t happen until summer. Proceeds from the February financing were to be used to pay down short-term debt and fund capital projects.
“That kicked it off,” said Sante Corona, executive managing director and head of equity capital markets at TD Securities. “From that point on, the offerings went well. Investors made money, markets continued to improve, volatility came down, and oil prices kept going higher. It just led to a lot of activity.”
In March, TransCanada announced it was buying Texas-based Columbia Pipeline Group for US$13 billion. The transaction was to be financed in part by a $4.42-billion equity offering. It was the largest bought deal ever done in Canada.
Pipeline companies are generally considered to be defensive, low risk investments that promise compelling yields. But in 2016, growth was also in the mix.
“Energy infrastructure over the past few years has been in a very unique place,” Neldner said. “Because of all the activity going on in the energy business, (the companies) actually have strong, attractive growth profiles. So you have this unique combination of growth plus yield plus defensive, high quality attributes.”
Energy infrastructure over the past few years has been in a very unique place
TransCanada would come back to the equity well in November. The original plan was to pay for part of the Columbia deal by selling off a minority interest in a Mexican natural gas pipeline business. But TransCanada’s stock had been climbing steadily since the announcement of the Columbia deal in March. So TransCanada decided to forgo the Mexican asset sale and raise another $3.52 billion in equity in November. In this deal, the common shares were priced 22 per cent higher than in the March offering.
“It was more accretive to issue the equity at a higher price than to monetize those Mexican assets,” said Alec Clark, managing director of investment banking in Calgary at TD Securities.
The enthusiasm for energy equity deals soon moved from pipelines to the exploration and production business. In June, Suncor Energy Inc. raised $2.88 billion. Proceeds were used to pay for the company’s previously announced acquisition of an additional five per cent stake in the Syncrude joint venture, as well as to pay down some debt and fund some growth. In September, Encana Corp. raised $1.52 billion bought deal, with proceeds used to strengthen its balance sheet.
“Investors were keen to back good companies, with great track records and with strong management teams,” Morassutti said.
In other mega-sized equity deals last year, another $1.97-billion slice of Hydro One Ltd. came to market in April. Bill Ackman’s fund Pershing Square Capital Management unloaded its stake in Canadian Pacific Railway for $1.83 billion in August. And Franco-Nevada Corp. raised $1.28 billion to pay for a precious metals stream from Glencore PLC’s Antapaccay Mine in Peru.
It’s hard to say this volume of mega-sized common share deals represents something of a new normal for Canada, or whether it was just a fluke given the mix of opportunities and market conditions. A majority of these offerings were sold to Canadian investors, which is contrary to what you might have expected a few years ago, Carona said.
“We’ve had this significant run of large deals in Canada,” Carona said. “The interesting thing about this number of large deals is that it highlights the capacity of Canadian markets to finance large transactions.”