The Globe and Mail, Christina Pellegrini and Niall McGee, 24 September 2017
When word got out in July that Hydro One Ltd. had retained Moelis & Co. to advise on its $4.4-billion deal for Spokane, Wash.-based utility Avista Corp., the reaction from many on Bay Street was: Hydro One hired who?
The transaction showed just how fierce the competition is for this kind of work and how Canadian investment banks have to do more to stay relevant to companies that are plotting growth outside of Canada. Moelis, a New York-based boutique bank, was well suited for the role "given their depth of M&A experience in the U.S. regulated electricity sector," a Hydro One spokesperson said last week. Canadian banks weren't entirely shut out: Three led Hydro One's equity financing deal to help pay for Avista, leveraging their vast institutional and retail distribution networks to raise money quickly. But Moelis ultimately won the lucrative advisory mandate – earning bragging rights as the top dog – and pocketed a $16-million fee, according to an estimate by Thomson Reuters.
In recent years, deal flow in infrastructure has exploded around the globe. Flush with cash, investment funds are on the hunt for assets with stable cash flow and governments are cashing in by moving to privatize certain public assets at rich valuations. This dynamic has resulted in a boom in dealmaking. Meantime, Canadian power and utilities companies have been keen on doing deals in the United States to diversify their businesses, access growing markets and boost their return on equity, says Mona Nazir, an analyst at Laurentian Bank Securities.
As companies expand into new regions, Canada's biggest investment banks are following suit. Many are bolstering their power and utility teams in the United States, hiring more bankers to work on the ground and boosting their coverage of the sector south of the border to capture more deal activity.
"Our Canadian clients' needs are evolving and are increasingly focused on the U.S.," said Pierre-Olivier Perras, the co-head of the power and energy infrastructure group at BMO Nesbitt Burns Inc. The bank is responding by looking at expanding its U.S. utilities practice, he added. "It's really about having the right relationships and the best ideas at the right time."
TD Securities too has singled out the sector as one of its key focuses over the next few years.
Scotia Capital Inc. began expanding its power and utilities franchise outside Canada years ago, following clients such as Emera Inc. and Fortis Inc. into the U.S. market. And it is still looking to add bankers to its U.S. team. In the next 12 months, the bank expects to have the same number of power and utility bankers on both sides of the border, said Charles Emond, who is co-head of global investment banking.
The bank has also built a presence in Latin America in a bid to advise local power and utilities clients or financial players such as the Canadian pension funds. While still early days in these countries, Mr. Emond estimates that roughly half of Scotia Capital's deal flow in the pipeline in the Pacific Alliance region is in power and utilities.
What matters most to acquirers is the proprietary insight their bank has about the regulatory landscape and a potential target, as well as access to that company's management and main shareholders.
"Those relationships with the target is really what resonates the most with the acquirer," Mr. Emond said. "That relationship, the access, the knowledge about the market is the way to often differentiate yourself and get hired."
But despite efforts by Canadian investment banks, they at times fall short when they compete against large U.S. firms for advisory mandates on cross-border deals.
San Francisco-based Wells Fargo Securities has advised on a number of large-cap utility, power and pipeline deals during the past few years, advising both U.S. and Canadian acquirers. When Wells is able to beat out the Canadian competition, said Eric Fornell, vice-chair of investment banking and capital markets, it's often because of lending relationships with companies that go back decades and deep ties with management.
Last year, when Wells advised TransCanada Corp. on its acquisition of Columbia Pipeline Group Inc., Mr. Fornell's relationships with decision makers on both sides was a major factor in winning the mandate; he'd known the CFO of Columbia for 20 years and the head of M&A at TransCanada since 1999. With that kind of history, bankers can have a very "straightforward, direct conversation" with management teams in a way "that's not threatening to them," he said.
Furthermore, when Algonquin Power & Utilities Corp. was negotiating to buy the Empire District Electric Co. in 2016, not only did Mr. Fornell know Algonquin's management well, he knew the Moelis adviser on the other side, having previously worked with him at another bank.
"He was not going to steer me wrong, and I'm not going to tell him anything that's untrue," he said of his dealings with his ex-colleague.
In terms of other Canadian banks in the United States, Mr. Fornell gives kudos to RBC Dominion Securities Inc., saying they have a solid team of bankers on the ground. "We're seeing RBC a lot," he said. (RBC declined to comment for this story.)
"They're doing business and they're lending money," he added. "It's just that in some cases, Wells Fargo and other U.S. banks have been at it longer."
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When word got out in July that Hydro One Ltd. had retained Moelis & Co. to advise on its $4.4-billion deal for Spokane, Wash.-based utility Avista Corp., the reaction from many on Bay Street was: Hydro One hired who?
The transaction showed just how fierce the competition is for this kind of work and how Canadian investment banks have to do more to stay relevant to companies that are plotting growth outside of Canada. Moelis, a New York-based boutique bank, was well suited for the role "given their depth of M&A experience in the U.S. regulated electricity sector," a Hydro One spokesperson said last week. Canadian banks weren't entirely shut out: Three led Hydro One's equity financing deal to help pay for Avista, leveraging their vast institutional and retail distribution networks to raise money quickly. But Moelis ultimately won the lucrative advisory mandate – earning bragging rights as the top dog – and pocketed a $16-million fee, according to an estimate by Thomson Reuters.
In recent years, deal flow in infrastructure has exploded around the globe. Flush with cash, investment funds are on the hunt for assets with stable cash flow and governments are cashing in by moving to privatize certain public assets at rich valuations. This dynamic has resulted in a boom in dealmaking. Meantime, Canadian power and utilities companies have been keen on doing deals in the United States to diversify their businesses, access growing markets and boost their return on equity, says Mona Nazir, an analyst at Laurentian Bank Securities.
As companies expand into new regions, Canada's biggest investment banks are following suit. Many are bolstering their power and utility teams in the United States, hiring more bankers to work on the ground and boosting their coverage of the sector south of the border to capture more deal activity.
"Our Canadian clients' needs are evolving and are increasingly focused on the U.S.," said Pierre-Olivier Perras, the co-head of the power and energy infrastructure group at BMO Nesbitt Burns Inc. The bank is responding by looking at expanding its U.S. utilities practice, he added. "It's really about having the right relationships and the best ideas at the right time."
TD Securities too has singled out the sector as one of its key focuses over the next few years.
Scotia Capital Inc. began expanding its power and utilities franchise outside Canada years ago, following clients such as Emera Inc. and Fortis Inc. into the U.S. market. And it is still looking to add bankers to its U.S. team. In the next 12 months, the bank expects to have the same number of power and utility bankers on both sides of the border, said Charles Emond, who is co-head of global investment banking.
The bank has also built a presence in Latin America in a bid to advise local power and utilities clients or financial players such as the Canadian pension funds. While still early days in these countries, Mr. Emond estimates that roughly half of Scotia Capital's deal flow in the pipeline in the Pacific Alliance region is in power and utilities.
What matters most to acquirers is the proprietary insight their bank has about the regulatory landscape and a potential target, as well as access to that company's management and main shareholders.
"Those relationships with the target is really what resonates the most with the acquirer," Mr. Emond said. "That relationship, the access, the knowledge about the market is the way to often differentiate yourself and get hired."
But despite efforts by Canadian investment banks, they at times fall short when they compete against large U.S. firms for advisory mandates on cross-border deals.
San Francisco-based Wells Fargo Securities has advised on a number of large-cap utility, power and pipeline deals during the past few years, advising both U.S. and Canadian acquirers. When Wells is able to beat out the Canadian competition, said Eric Fornell, vice-chair of investment banking and capital markets, it's often because of lending relationships with companies that go back decades and deep ties with management.
Last year, when Wells advised TransCanada Corp. on its acquisition of Columbia Pipeline Group Inc., Mr. Fornell's relationships with decision makers on both sides was a major factor in winning the mandate; he'd known the CFO of Columbia for 20 years and the head of M&A at TransCanada since 1999. With that kind of history, bankers can have a very "straightforward, direct conversation" with management teams in a way "that's not threatening to them," he said.
Furthermore, when Algonquin Power & Utilities Corp. was negotiating to buy the Empire District Electric Co. in 2016, not only did Mr. Fornell know Algonquin's management well, he knew the Moelis adviser on the other side, having previously worked with him at another bank.
"He was not going to steer me wrong, and I'm not going to tell him anything that's untrue," he said of his dealings with his ex-colleague.
In terms of other Canadian banks in the United States, Mr. Fornell gives kudos to RBC Dominion Securities Inc., saying they have a solid team of bankers on the ground. "We're seeing RBC a lot," he said. (RBC declined to comment for this story.)
"They're doing business and they're lending money," he added. "It's just that in some cases, Wells Fargo and other U.S. banks have been at it longer."
