Hydro One offering may bring in less than expected
TORONTO• The decline in the stock market since the government of Ontario announced last spring it would privatize Hydro One, combined with a desire to “reset its capital structure,” means the proceeds from the initial public offering by the electricity transmission and distribution company will be lower than originally expected.
“The market has moved and the multiples aren’t as high as they were,” noted one banker when explaining the change.
On Friday the issuer filed an amended and restated preliminary prospectus and indicated it would sell 81.1 million shares with each share expected to be sold in the range of $19 to $21 a share. If the mid point of the range is used then the issue will generate gross proceeds of $1.622 billion, all of which will flow to the provincial government.
If the over-allotment option is exercised, then the company will sell 89.25 million shares — for gross proceeds of $1.785 billion — meaning the govern- ment will have sold off 15 per cent of the utility. In time the province plans to sell another 45 per cent — meaning the public will hold 60 per cent of the company with the government retaining the other 40 per cent stake.
Given that Hydro One has 595 million shares outstanding, the October 2015 valuation for the utility becomes $11.9 billion. Earlier this year the government pegged Hydro One’s value at between $13.5 billion and $15 billion — or $14.25 billion if the mid-point is used.
But not all the decline in valuation can be explained the fall in the stock market. Part the decline can be attributed to the decision to reset the capital structure and take on $800 million of additional leverage. From now on, it will operate with 60 per cent debt and 40 per cent equity.
As had been expected, Hydro One will be a dividend-paying company. The prospectus indicates it will pay 21 cents a quarter — or 84 cents for the year — for a dividend yield of 4.2 per cent. In this way Hydro One will be able to compete with two comparable companies: Halifax-based Emera Inc. and Fortis Inc. of St. John’s.