Pedestrians walk past the old Toronto Stock Exchange sign in Toronto, on Oct. 1, 2019.Fred Lum
Equity markets are beginning to reopen for well-established Canadian companies looking to bolster their balance sheets for opportunistic mergers and acquisitions.
After markets closed on Tuesday, auto-repair company Boyd Group Services Inc. announced a $200-million bought deal co-led by CIBC Capital Markets, Cormark Securities Inc., Goldman Sachs and National Bank Financial Inc.
The Boyd deal was the first Canadian equity financing over $150-million since the COVID-19 crisis hit the markets in early-March, and one of only a few Canadian equity deals outside the mining sector in the past two months. Smaller financings in recent weeks have included two $20-million bought deals by group-benefits provider People Corp. and supply-chain software firm Tecsys Inc.
For the most part, companies have been unwilling to go to market when their share prices are way down, which would further dilute existing shareholders. Conversations about raising equity, however, have picked up in recent weeks, as share prices have firmed up and relatively well-placed companies have begun looking at harder-hit competitors as potential acquisition targets.
“A lot of the larger companies that have built track records on M&A have their target list and it’s getting constantly updated,” said Alfred Avanessy, Cormark’s head of investment banking.
“The thought process now is you’re looking at a lot of these private companies and you’re saying, ‘well that guy probably doesn’t have the same access to capital that I do ... I should start preparing now for when these discussions start becoming more interesting and I could be looking at distressed opportunities,'” Mr. Avanessy said.
Boyd, which has grown significantly through M&A in both Canada and the U.S., said almost as much in a statement issued on Tuesday.
“We believe there will be many opportunities that come from this crisis, both internal and external," Boyd CEO Tim O’Day said in the statement. “Our strong balance sheet, which will be further strengthened by this financing, will put us in the best possible position to come out of this crisis as a stronger company.”
The company said it could not comment further as it is in quiet period ahead of reporting earnings on May 13.
Investors appear to be receptive to these kind of forward-looking deals, Mr. Avanessy said. The Boyd deal, for instance, was done at only a slight discount to its market share price. (Investment bankers usually price deals below the current share price to entice buyers; tight discounts mean investors are eager to buy the new shares.)
Tyler Swan, head of execution for CIBC World Markets’ equity capital markets division, echoed this sentiment. Institutional investors with considerable “dry powder” are hungry for high-quality company deals.
“I think there will be willing investors to support financings. It’s more a matter of the companies choosing when and if they want to raise capital," he said.
Equity deal flow has already picked up in the United States, Mr. Swan said, although much of this has been distressed companies, in sectors such as retail or travel, shoring up their balance sheets to stay afloat.
Around half of the recent equity financings in the U.S. have involved convertible debentures, Mr. Swan said. These are a type of debt instrument that can be converted into shares if stock prices go up, and are typically favoured by investors looking for downside protection.
So far, few Canadian companies have looked to issue equity for defensive purposes, relying instead on debt markets.
“Lenders have generally been very supportive of companies in this environment, and companies had a lot of liquidity coming into this environment. So we don’t sense a great urgency for companies to come and do financings to reinforce their balance sheets, that’s something that will happen over time," Mr. Swan said.
The place to watch for near-term equity activity, particularly once earnings come out next month, is with companies looking to expand.
“A lot of those strong companies hope to get stronger throughout this crisis," Mr. Swan said.
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