The Globe and Mail, Boyd Erman, 15 June 2007
Canada's initial public offering market is heading for a record in futility.
As the halfway mark of 2007 approaches, Canadian companies have raised only about $770-million (U.S.) in initial public offerings, according to Bloomberg figures. That's the slowest start to a year since the tech bubble burst in 2001, and investment bankers say there are no big deals in the pipeline that will significantly raise that total any time soon.
To put that meagre tally in perspective, Teranet Income Fund alone raised almost that much in a single IPO about a year ago, helping the Canadian market to garner $4.55-billion via stock sales in the first half of 2006.
"It's dead - a dribble compared to recent years," said Ross Sinclair, national leader of the IPO and income trust group at PricewaterhouseCoopers LLP.
When the tech mania died, plunging markets scared buyers and virtually shut down the IPO market. This time, with the S&P/TSX composite index close to a record high, bankers point to a paucity of sellers as the culprit.
The option of going public as a highly valued income trust is gone, private companies that do need capital can borrow all they need at low rates and most large, IPO-quality companies that do want to sell have private equity buyers lined up, chequebooks open.
Companies that can sell themselves, or a portion of themselves, quickly for cash, are easily persuaded to dispense with the $1-million to $2-million cost of an IPO.
Also, an IPO can involve months of paperwork and regulatory scrutiny. Sellers also don't know what price they will get until the last minute, when the investment bankers running the deal take a reading on the market.
"That's a big bet for a lot of these companies," Mr. Sinclair said. "It's a bet they're not prepared to take, and now the high-water mark for valuation isn't the trust market, it's the private equity market and that's why you're seeing a lot more private equity deals."
For companies such as BCE Inc., which late last year was working to sell its Telesat arm, the IPO has become a Plan B in case nobody shows up at the auction. And with so much private equity money floating around, there's almost never a need for the backup plan.
BCE paid lip service to the idea of taking Telesat public, but chief executive officer Michael Sabia later admitted he had focused all along on trying to find a buyer for the business. He did: BCE sold Telesat to a group of buyers for $2.6-billion, about a third more than most analysts guessed it would fetch.
"It's pretty hard to beat the private equity option with anything in the public markets," said the head of new equity sales at one of the country's big banks.
Few companies now run so-called "dual-track" processes where they simultaneously look at a public offering and run an auction, investment bankers say.
"They don't even bother with the IPO track. It's expensive and unlikely to be the winning route," said another senior investment banker.
The hardest hit by the slowdown in IPOs have been the biggest securities dealers, which have tended to cater to more established companies - the kind that are most attractive to private equity firms.
In fact, of the dealers owned by Big Five banks, none has completed an IPO for a Canadian company this year, though that's set to change with a pair of small technology deals in the works.
TD Securities Inc., an arm of Toronto-Dominion Bank, is teaming up with boutique Genuity Capital Markets to lead the $40-million debut of RuggedCom Inc., and CIBC World Markets Inc., the securities unit of Canadian Imperial Bank of Commerce, and Genuity are running the $50-million IPO of TeraGo Networks.
Meantime, other boutique investment banks, such as GMP Capital Trust, Blackmont Capital Inc. and Canaccord Capital Inc., have been busy taking public the smaller firms and commodity companies they have historically focused on.
In the U.S., by contrast, the IPO market is keeping up with last year's busy pace and private equity, ironically, is helping to fuel the market, as big buyout firms such as Blackstone Group prepare to go public.
To be sure, bankers up north in Toronto won't starve, even though IPOs are among the highest-margin businesses for investment dealers.
Securities firms are making record fees helping to sell companies to private equity funds. And companies that are already public are taking advantage of investors' appetites for more stock by doing financings. When those deals are included in the overall tally, Canadian companies have raised $13.5-billion so far this year. That's actually ahead of last year's pace.
But Mr. Sinclair doesn't expect the IPO market in Canada to turn around any time soon, even if bankers can come up with an alternative to the income trust structure.
"The trust market took 10 years to really get going, so it could be quite some time before the public latches on to something else and becomes comfortable," he said.
;
Canada's initial public offering market is heading for a record in futility.
As the halfway mark of 2007 approaches, Canadian companies have raised only about $770-million (U.S.) in initial public offerings, according to Bloomberg figures. That's the slowest start to a year since the tech bubble burst in 2001, and investment bankers say there are no big deals in the pipeline that will significantly raise that total any time soon.
To put that meagre tally in perspective, Teranet Income Fund alone raised almost that much in a single IPO about a year ago, helping the Canadian market to garner $4.55-billion via stock sales in the first half of 2006.
"It's dead - a dribble compared to recent years," said Ross Sinclair, national leader of the IPO and income trust group at PricewaterhouseCoopers LLP.
When the tech mania died, plunging markets scared buyers and virtually shut down the IPO market. This time, with the S&P/TSX composite index close to a record high, bankers point to a paucity of sellers as the culprit.
The option of going public as a highly valued income trust is gone, private companies that do need capital can borrow all they need at low rates and most large, IPO-quality companies that do want to sell have private equity buyers lined up, chequebooks open.
Companies that can sell themselves, or a portion of themselves, quickly for cash, are easily persuaded to dispense with the $1-million to $2-million cost of an IPO.
Also, an IPO can involve months of paperwork and regulatory scrutiny. Sellers also don't know what price they will get until the last minute, when the investment bankers running the deal take a reading on the market.
"That's a big bet for a lot of these companies," Mr. Sinclair said. "It's a bet they're not prepared to take, and now the high-water mark for valuation isn't the trust market, it's the private equity market and that's why you're seeing a lot more private equity deals."
For companies such as BCE Inc., which late last year was working to sell its Telesat arm, the IPO has become a Plan B in case nobody shows up at the auction. And with so much private equity money floating around, there's almost never a need for the backup plan.
BCE paid lip service to the idea of taking Telesat public, but chief executive officer Michael Sabia later admitted he had focused all along on trying to find a buyer for the business. He did: BCE sold Telesat to a group of buyers for $2.6-billion, about a third more than most analysts guessed it would fetch.
"It's pretty hard to beat the private equity option with anything in the public markets," said the head of new equity sales at one of the country's big banks.
Few companies now run so-called "dual-track" processes where they simultaneously look at a public offering and run an auction, investment bankers say.
"They don't even bother with the IPO track. It's expensive and unlikely to be the winning route," said another senior investment banker.
The hardest hit by the slowdown in IPOs have been the biggest securities dealers, which have tended to cater to more established companies - the kind that are most attractive to private equity firms.
In fact, of the dealers owned by Big Five banks, none has completed an IPO for a Canadian company this year, though that's set to change with a pair of small technology deals in the works.
TD Securities Inc., an arm of Toronto-Dominion Bank, is teaming up with boutique Genuity Capital Markets to lead the $40-million debut of RuggedCom Inc., and CIBC World Markets Inc., the securities unit of Canadian Imperial Bank of Commerce, and Genuity are running the $50-million IPO of TeraGo Networks.
Meantime, other boutique investment banks, such as GMP Capital Trust, Blackmont Capital Inc. and Canaccord Capital Inc., have been busy taking public the smaller firms and commodity companies they have historically focused on.
In the U.S., by contrast, the IPO market is keeping up with last year's busy pace and private equity, ironically, is helping to fuel the market, as big buyout firms such as Blackstone Group prepare to go public.
To be sure, bankers up north in Toronto won't starve, even though IPOs are among the highest-margin businesses for investment dealers.
Securities firms are making record fees helping to sell companies to private equity funds. And companies that are already public are taking advantage of investors' appetites for more stock by doing financings. When those deals are included in the overall tally, Canadian companies have raised $13.5-billion so far this year. That's actually ahead of last year's pace.
But Mr. Sinclair doesn't expect the IPO market in Canada to turn around any time soon, even if bankers can come up with an alternative to the income trust structure.
"The trust market took 10 years to really get going, so it could be quite some time before the public latches on to something else and becomes comfortable," he said.
