Placements give issuers bang for buck

How to stretch the size of an equity deal without having to give up too much of a price concession is a challenge faced many times when an issuer announces a large acquisition.

One way to bridge that gap is to line up partners ahead of time who will help provide the equity needed for such an acquisition.

The latest example played out this week when AltaGas Ltd. priced a $2.5-billion offering of subscription receipts, the proceeds of which will help fund its acquisition of WGL Holdings Inc.

Of the $2.5 billion being raised, the public will kick in $2.1 billion via the sale of 67.8 million subscription receipts at $31 per receipt. The rest will come from OMERS, the pension plan for Ontario’s municipal employees, which has agreed to buy 12.91 million receipts also at $31. OMERS is buying via a private placement.

When the WGL acquisition closes, holders of receipts will exchange them for common shares. Along the way, holders will also receive dividends.

The financing — and the acquisition — was announced about two weeks after a report indicating the Calgary-based company was in talks. That report — which included the target’s name and an estimate of the likely cost — caused a five-per-cent drop in AltaGas’s share price. On much larger than normal volume, the stock was down $1.65 to $32 on that day.

While it recovered somewhat over the next two weeks it didn’t get back to $33.65. When the $2.5-billion financing was announced, the shares were trading at $33.32, which means the new issue was priced at a seven-per-cent discount. It’s a reasonable guess that a $2.5-billion equity raise, all done to the public, would have required a bigger concession. The shares closed Thursday at $31.18.

It’s not known when OMERS was asked to invest on a concurrent basis. Calls to AltaGas seeking a comment were not returned.

A review of concurrent private placements over the past five years prepared by Tim Lin of FP Data Group shows that such deals come in many forms. In some cases — and Lin reported at least 50 examples — they are the parent/related party buying stock to maintain their equity stake (when Great West Life raised $650 million in July, 2014, Power Financial and IGM Financial invested $600 million); in others they represent shares bought by a financial backer that had become a cornerstone investor (such as when CPPIB and Caisse de dépôt bought shares in WSP Global to help finance acquisitions); in others (such as when the Caisse invested $511 million in a $1.77-billion equity offering by Manulife Financial) they were used to boost the size of the deal.

But the structure — of the buyer seeking out potential equity partners — is not confined to established companies: it has occurred, though not that often, with companies seeking to go public. For instance, Fairfax Africa Holdings Corp., which is set to go public next month, has $116 million of support from two institutional shareholders, OMERS and certain investment funds managed by Harbour Advisors. Fairfax Financial has also agreed to invest up to US$300 million. OMERS and Fairfax were concurrent buyers when Fairfax India raised additional capital earlier this month.

It has also extended to the bond world.

Some provincial governments (including Ontario, Manitoba, Saskatchewan and Alberta) have introduced the idea of “carve outs” as a way of boosting the size of an issue. In those situations a buyer agrees to purchase a large block of new bonds and those terms become the terms for a public issue of such bonds.

THE NEW ISSUE WAS PRICED AT A SEVEN-PER-CENT DISCOUNT.