Bay St. skeptical of NDP pledge
Horwath promises to purchase Hydro One back, piece by piece
Andrea Horwath has pledged to buy back Hydro One bit-by-bit if she’s elected premier June 7, but Bay Street watchers are warning that would be easier said than done.
A cornerstone promise of the NDP leader’s campaign is to reduce electricity prices by returning the former Crown utility to full public ownership, reversing a partial privatization by Premier Kathleen Wynne’s Liberal government that raised $9 billion to pay down debt and build infrastructure.
But with almost 313 million shares now in private hands, currently valued at $20.45 on the Toronto Stock Exchange, that’s a steep price tag of $6.4 billion to tackle with just $248.5 million in annual dividends that Horwath would use as her initial stake.
At that rate, completing the deal could take two decades, not the eight years the NDP is telling voters, stock market experts say. That raises questions about the feasibility of the scheme, let alone the odds of New Democrats being in power long enough to get it done.
“The practicalities of it are pretty daunting,” said veteran lawyer Paul Harricks, leader of the energy sector group at Gowling WLG.
Horwath’s time frame works out only if Hydro One shares collapse, falling to $6 or $7, added Ambrus Kecskes, an associate professor of finance at York University’s Schulich School of Business.
“I’m not even sure why they would stick their necks out with such rudimentary arithmetic,” Kecskes said.
While Bay Streeters say investors would demand a premium of 20 to 30 per cent on the share price, the New Democrats’ plan factors in just 10 per cent.
“The strategy is a bad strategy,” said Peter Dey, chairman of investment dealer Paradigm Capital Inc., noting the extra expense of a long-term buyback would be in the $2 billion to $3 billion range.
At the current stock price — not including a likely premium, or fees to investment dealers — government dividends in the first year could bankroll a buyback of 12.1 million shares, or barely 4 per cent, at the start of a creeping takeover.
But New Democrats are undeterred after first floating the concept in the winter of 2017, when only 30 per cent of the Hydro One shares had been sold, compared with the 52.6 per cent in private hands now.
“That still doesn’t change our plans ... It’s our expectation to use the money, the profits, from Hydro One to pay for the repurchase,” said the NDP’s energy critic, Toronto-Danforth MPP Peter Tabuns.
Pressed on the NDP assumptions, Tabuns added that “there may be circumstances that assert themselves, but for the moment I don’t think the changes are fundamental enough for us to re-shape that plan.”
The NDP election platform boasts the party can reduce electricity bills by 30 per cent, in part by returning Hydro One to “public hands” so it can “serve the public interest again” without a built-in profit margin for shareholders.
“Privately owned utilities are more expensive and don’t provide better service,” said senior economist Sheila Block of the Canadian Centre for Policy Alternatives.
Tabuns dismissed talk of shareholders demanding larger premiums to sell their stock as “speculative.”
“The value of the shares has been dropping in the last while,” he said.
When a major player such as the Ontario government declares its intent to acquire shares, however, shareholders take notice and smell the money, experts say.
Fully 67 per cent of Hydro One’s shares are held by institutional investors such as mutual funds and pension funds.
“Once the market knows that you’re buying, that’s going to keep a floor price under the share price. That’s going to keep the price up,” Harricks said.
The closer the government gets to the end of the purchase phase, the more “holdout” shareholders are going to demand, Dey said.
“We know the province wants to get100 per cent so people will go into the market expecting that they will have to be paid a premium to be taken out.”
Energy Minister Glenn Thibeault, whose government cut hydro rates 25 per cent through longer-term borrowing to finance improvements in the electricity system, labelled the NDP plan a “pie in the sky.”
He said there are no guarantees it would reduce electricity bills, but would divert millions of dollars in Hydro One dividends that are currently going into the government’s general revenues, leaving a shortfall.
The fact the New Democrats apparently did not consult investment industry professionals to help shape the promise “just shows they don’t have any business acumen,” Thibeault added.