GMP FirstEnergy on right track
It’s been almost eight months since Calgary-based investment bank FirstEnergy Capital Corp. announced it was merging with Toronto-based GMP Securities.
The deal, which was seen as a takeover of FirstEnergy by GMP, surprised many for reasons that included the fact GMP had effectively gutted its energy practice in Calgary. It is also a publicly traded company. FirstEnergy had prided itself on being a private partnership.
But deals are done for many reasons.
For GMP, it was a way to regain a foothold in the energy space. For some of the senior and founding members of FirstEnergy, it offered an exit strategy. Also surprising was the timing; a bullish bet on the resurgence of the oil and gas sector.
GMP FirstEnergy held its annual meeting in Calgary — not Toronto — last week; the first AGM for the combined entity.
In an interview ahead of the meeting, chief executive Harris Fricker was decidedly upbeat on how the merger has unfolded. Not that it was a blind date.
As independent investment firms dealing mostly in the small to mid-cap space, they had participated in many deals together over the years. Fricker said FirstEnergy was desired because it was an independent firm and active in a sector GMP had backed away from. There wasn’t much overlap.
Where GMP would benefit from having immediate re-exposure to the oilpatch, FirstEnergy would also benefit from other sectors where GMP was more involved in terms of financing and research coverage.
At the heart of both firms was the ability to actively and responsively serve the small and mid-cap sectors. Being bigger not only means a broader reach, but a better shot at pushing back at the big banks and their wider array of financing options.
Fricker shows no sign of buyer’s remorse. Quite the opposite.
“Thing are going better than expected ... the synergies between the businesses are more than I expected,” he said. “There are instances where we have deep trading relationships outside of oil and gas where we have been able to make introductions to the desk out here, and vice versa. We didn’t really anticipate that.”
The objective of the merger was to preserve FirstEnergy’s franchise, said Fricker.
“Our goal has been not (to) mess that up,” he said.
There’s an adage in the investment world that it’s tough to time the market.
More important is recognizing how to play for the long term, through the peaks and troughs, not unlike the oilpatch.
“If you are going to be a viable independent broker dealer in Canada, you need to be a toptier oil and gas franchise,” said Fricker. “There are times when that will be popular and there are times when it won’t be. We are at the ‘won’t be’ point in the cycle.”
While the energy sector is often looked at through the lens of the big players, a strong small and mid-cap sector is also very important to the health of the industry.
It’s that segment where the independent dealers, such as GMP FirstEnergy and Peters & Co., have been key players raising money for smaller players and advising on mergers and acquisitions.
There was once a level playing field in terms of the big banks and the smaller dealers, but that has changed dramatically over the years.
A decade ago, big and small investment firms would often appear in deals involving bigcap players as there was value placed on the knowledge held by the independents in terms of who was trading and holding the shares.
The landscape changed significantly with the 2008 financial crisis.
“Technology really came into the business, algorithmic trading, the beginnings of sustained pressure on costs from buy side firms,” said Fricker.
What hasn’t changed for small and mid-cap players when it comes to raising capital and ensuring their shares reflect the underlying value of the assets, research, sales and trading is critical. That’s the niche where independent dealers can add value, since the big banks don’t tend to pay attention until companies get to a certain size.
“What we trade is small to mid-cap and that isn’t going algorithmic. You need to know who’s where, you need to be in the market on a regular basis, you need to use your liability book to facilitate trade in those names,” said Fricker.
A sign of how bifurcated the market has become occurred last year, when Suncor did its big equity issue in 2016 and none of the Calgary independents were included.
The bottom line for Fricker is this: the decision to invest in FirstEnergy is a reflection of GMP’s confidence in the franchise FirstEnergy built over the 23 years previous to last August’s deal, and the importance of the Canadian energy sector to the overall economy.
The energy sector, through the GMP FirstEnergy franchise, now has a bigger voice in Toronto and Eastern Canada. And that is much needed and long overdue.