Roots trips up on first day of trading

But deal’s bankers pocket $11M in fees

Afew years back, in response to a question as to why closedend funds kept getting issued when they immediately trade lower and almost never trade near net asset value, one provider said he assumed the broker had to do a trade to “put food on the table for the kids.”

That comment came to mind Wednesday when Roots Corp., one of Canada’s most iconic brands — its clothing is worn by Olympic athletes and the average punter — started trading on the TSX.

It was a complete disaster especially for retail investors who were presumably well-advised on the merits of buying a stake. More than 40 per cent of the shares turned over, indicating the shares were not placed in the hands of long-term holders. And the shares, issued at $12, below the $14-$16 range that was originally planned, traded down even further: At one stage they hit $9.48, representing a 21-per-cent loss. (From $16 the loss is a staggering 41 per cent.)

They closed the day at $10, meaning every investor who bought in the IPO suffered.

“As the old saying goes,” noted one broker whose firm didn’t participate in the offering, “you only get one chance to make a first impression and this will be leaving a very negative impression.”

“Can you imagine the retail buyers being very keen on walking into a Roots store and buying stuff?” he asked. “The deal should have been pulled.”

So how should the blame be assigned? There is a lot to go round given that the agents — a group that includes the book runners (TD, Credit Suisse and BMO) and their sales crew — pocketed $11 million for advising the issuer and placing the shares.

At 5.5 per cent, the fees are healthy, and above the five per cent paid when Aritzia went public at $16 a share last fall. (Those shares hit an all-time low last week of $11.01.) But the fee is a tad lower than the six per cent the agents received when Freshii went public this year at $11.50 a share. (The same shares can now be purchased for $5.58 in the market.) All three issuers were taken to market backed by an aggressive growth strategy.

Back to assigning blame, which usually falls on three distinct groups in these situations.

In no particular order there is the selling shareholder group, which in this case included the private equity firm Searchlight Capital, which bought a majority stake exactly two years back.

By definition a private equity firm, which normally has outside partners, is not a long-term investor: it normally wants in and out in a few years. The prospectus stated Searchlight’s interests “may not align with the interests of our other shareholders.”

Then there are the evereager investment bankers who believe a fee can be generated in seemingly every situation. The Roots deal was completed a week before fiscal year-end at the banks, and thus will presumably be part of the bonus pool for those who partook. Clearly the issue was overpriced given the objective of any equity offering is for it to trade up a tad in the after market.

Then there are the investment advisers, who are not known to complain at the prospect of another payday. Given all the contortions (and for no definitive conclusion) the regulators have gone through on embedded commissions, the Roots’ IPO may offer a good example of what motivates advisers.

YOU ONLY GET ONE CHANCE TO MAKE A FIRST IMPRESSION.

LAURA PEDERSEN / NATIONAL POST Roots Corp., one of Canada’s most iconic brands, started trading on the TSX on Wednesday and more than 40 per cent of the shares turned over, proof the shares were not placed in the hands of long-term holders.