Hydro One exterior, July 10, 2017Fred Lum/The Globe and Mail
No Canadian investment banks were hired as financial advisers on Hydro One Ltd.'s $4.4-billion mega deal to buy Avista Corp. – neither on the acquirer's side, nor the acquired's – meaning domestic bankers will miss out on a estimated $42-million fee.
Lately Canadians getting shut out – or mostly shut out – of large cross-border mergers and acquisitions (M&A) mandates in the utilities sector isn't unusual, it turns out.
Analysis of the biggest M&A deals over the past year involving Canadian utilities buying U.S. competitors reveals that Americans generally get paid via the high-profile M&A fee, and Canadians earn their keep via the slightly lower profile associated bought-deal financing.
Financial advisory fees are generally not disclosed in North America, but Thomson Reuters comes up with an estimate based on the value of the transaction, which is typically how advisers are paid.
Hydro One turned to American boutique Moelis & Co. for financial advice. Moelis will take home roughly $16-million, based on getting paid 0.25 per cent of the value of the deal according to Thomson Reuters. Avista Corp. tapped Bank of America Merrill Lynch, which is projected to make $25.6-million.
While Canadian bankers are usually thrown some sort of bone on the M&A fee side, there have been other instances where they have been shunned entirely on large cross-border deals in utilities.
For example, last year, when TransCanada Corp. announced it was buying Columbia Pipeline Group Inc. for $13-billion (U.S.), it turned to Wells Fargo Securities LLC and JPMorgan Chase & Co. for advice. Columbia used Goldman Sachs & Co. and Lazard LLC.
Where a Canadian investment bank (or two) will generally pop up as an adviser on a large cross-border utility deal, is when more than two advisers are used. For example, when Fortis Inc. announced it was buying ITC Holdings Corp. for $11.3-billion, Fortis used Goldman and Scotia Capital Inc. ITC tapped Barclays, Morgan Stanley and Lazard.
Ditto earlier this year, when AltaGas Ltd. announced its $4.5-billion acquisition of WGL Holdings Inc. AltaGas turned to JPMorgan, TD Securities Inc. and OMERS. WGL meantime used Goldman and Lazard.
Even though Canadian bankers may be able to offer similar tactical advice as their U.S. counterparts on how to approach a target and craft an offer, there is still a belief that the Americans would possess more expertise on the ins and outs of the utilities sector, including knowledge of the U.S. regulatory landscape, and have more established platforms to offer cross-border support.
However, large M&A transactions generally also have large financing deals tacked on – which is where the Canadian bankers can make their money.
Domestic bankers stand to make a fee of at least $49-million on the Hydro One transaction on the associated bought deal. A syndicate of bankers led by RBC Dominion Securities Inc., CIBC World Markets Inc. and BMO Nesbitt Burns will earn a commission of 3.5 per cent for selling $1.4-billion (Canadian) in convertible debentures.
Canadians cornering the bought deal makes perfect sense. Domestic bankers pioneered this method of financing in the 1980s and it remains the default financing option for many big publicly traded equity deals in this country. Even though the bought deal has grown in popularity over the past few years in the U.S., large transactions tend to be sold via marketed offerings, which take much longer to execute.
Also Canadians, particularly the large bank-owned firms, have vast distribution channels in this country, both on the institutional and retail side, which means large equity deals can be sold quickly.