Three days after Russia invaded Ukraine and spooked anyone considering investing in Europe, Halifax-based Chorus Aviation Inc. launched a bet-the-house takeover of one of the largest European aircraft leasing companies.
Finding cash to pay for the US$855-million purchase of London-based Falko Regional Aircraft would have been tough at the best of times. The price tag on this deal is 50 per cent larger than the Canadian aviation company’s market capitalization.
Last week was far from the best of times, with equity markets swooning as investors reacted to the horrors of war. For companies looking to raise money by selling stock, public markets were all but closed.
Joe Rendell, Chorus’s chief executive, has called the acquisition a transformative one that will make his company into a major player in global aviation. He was able to launch the takeover only by tapping one of Canada’s deep capital pools for support.
Chorus funded the bulk of the US$445-million cash portion of the Falko purchase by setting up what’s known as a PIPE financing – short for Private Investment in Public Equity – with an arm of Brookfield Asset Management Inc.
While the record-breaking pace of mergers and acquisitions seen last year is expected to slow in the face of rising interest rates and the uncertainty stemming from Russia’s aggressive actions, financing through PIPEs remains a proven way to pay for takeovers. When a company sells common stock or preferred shares – the most common types of PIPE financings – to an institutional investor, it gets both cash and a Good Housekeeping seal of approval that reassures lenders and retail investors.
Chorus is paying for Falko, currently owned by Fortress Investment Group LLC, by raising a total of US$374-million from the special investments arm of Brookfield in exchange for US$300-million of preferred shares and US$74-million of Chorus stock. The preferred shares pay an 8.75-per-cent annual dividend. In a news release, Mr. Rendell said: “We are extremely pleased to have Brookfield, a well-respected company with global reach, as our strategic cornerstone investor.”
PIPE investments feature in a number of recent takeovers, with deep-pocketed Canadian funds backing expansion strategies at mid-sized domestic companies.
Last month, Longueuil, Que.-based Innergex Renewable Energy Inc. raised $210-million to buy wind farms in Chile, in part by doing a PIPE valued at $37.3-million with long-time shareholder Hydro Quebec. Innergex sold shares in public markets to raise the rest of the money.
Richmond, B.C.-based specialty food company Premium Brands Holdings Corp. has made a series of acquisitions using PIPE investment from the Canada Pension Plan Investment Board. And last year, Superior Plus Corp. announced that it planned to consolidate the fragmented U.S. propane distribution business with money from a US$260-million PIPE from Brookfield. Superior has since made a series of small acquisitions.
Law firm Fasken Martineau DuMoulin LLP does an annual survey of PIPE deals. It said in a recent report that such financing is well suited to uncertain conditions, including COVID-related market volatility. Writing before the outbreak of war in Europe, Faskens said: “We expect to see PIPE volumes remaining robust.”
Fasken’s study showed that, in 2020, the average PIPE for a Canadian company raised $104-million, and the largest was $795.2-million. The study also showed that 40 per cent of PIPE deals saw the investor get governance power at the public company. At Chorus, for example, two Brookfield nominees joined the aviation company’s board of directors.
“From the perspective of an investor, a PIPE can provide downside protection, an effective say in the business and upside gains,” the Fasken study said. “For issuers, a PIPE can act as an effective financing while securing a strategic partner, and in the case of those issuers facing tough times, allows for the raising of significant capital without selling the entire business at a depressed value.”
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Andrew Willis