April 20, 2002 - Hydro One delay will hurt value
'This is the kind of thing that only happens in Latin America,' U.S. investor laments
Paul Vieira and Sinclair Stewart, with files from Robert Benzie
Financial Post
Peter J. Thompson, National Post
Ernie Eves, the Ontario Premier, declined to speculate on his next move, including whether he would recall the legislature.
An Ontario court ruling that puts the planned $5.5-billion privatization of Hydro One Inc. on hold will likely reduce the amount of money raised when the company eventually does go public, according to an executive involved with the deal.
"It will absolutely hurt the value ... and hurt the proceeds the government can fetch. A delay is bad," said a senior investment banker participating in the Hydro One underwriting syndicate.
He said the ruling has already caused ripples among potential U.S. institutional investors, one of whom compared Canada to a banana republic.
"This is the kind of thing that happens in Latin America," the investor complained to the banker in an e-mail. "I didn't know Canada had a political judiciary."
Justice Arthur Gans of the Ontario Superior Court yesterday upheld challenges by a pair of unions and ruled that the provincial government does not have the legislative authority to sell shares in the monopoly electricity transmitter, delaying what was expected to be the largest initial public offering in Canadian history.
The privatization, which was scheduled to occur in June, was one of the key elements of Ontario's plan to restructure its $10-billion electricity market. The province will open the market to competition on May 1, regardless of the ruling.
Most observers viewed the court's decision as only a temporary setback, predicting the government will either appeal against the decision or use its majority to pass legislation enabling the IPO to move ahead.
But the real question on Bay Street, which has been salivating for a marquee company IPO after spending much of the past year pumping out structured product offerings, is how long the deal will be delayed, and the financial cost of the postponement.
The legislature is not slated to convene until next month, and Hydro One will also likely have to file a new preliminary prospectus with regulators.
Ernie Eves, the Ontario Premier whose administration was sworn in on Monday, conceded the ruling will delay the IPO and promised the government would abide by the court's decision. However, he declined to speculate on his next move, including whether he would recall the legislature.
"Well, that's an option, I suppose. I'll have to wait to see which options [David Young], the Attorney General, recommends."
Terry Young, a spokesman for the utility, declined to comment.
BMO Nesbitt Burns Inc., RBC Dominion Securities Inc. and Goldman Sachs & Co., which were awarded the coveted lead positions on the IPO, are anxious to circulate the prospectus and begin stoking demand for the issue, said the investment banker, who added a delay in momentum could discourage investors.
"Investors are not going to sit around and say that my life depends on buying Hydro One shares. They'll just take their money and invest it elsewhere. ... They don't like to hear that the sale is on again, off again, on again."
"Delays are never good for anything, whether it's baseball or offerings," said another senior banking official. "But I think the offering will be just as successful in the fall as it would be in the spring."
Jim Doak, president of Enterprise Capital Management Inc. of Toronto, dismissed the court blockage as "trivial," and said no new issues have been raised that would have a negative impact on the value of the offering. "If the market is stable, meaning the level of interest rates [and] the level of the stock market, why would this be priced differently next Wednesday from this Wednesday?"
Jenny Catalfo, a hydro analyst with Standard & Poor's in Toronto, echoed Mr. Doak's sentiments, and predicted most of the interested investors will be lining up for the issue once the problem is resolved.
"It has put a damper on things for now, but once matters are resolved, I don't think it will negatively affect the IPO."
The uncertainty surrounding Hydro One failed to dent the company's credit rating. Dominion Bond Rating Service Ltd. yesterday confirmed the utility's commercial paper at "R-1 (low)" and its senior unsecured debentures at "A."
Matthew Kolodzie, a financial analyst with DBRS, said bond holders like Hydro One because it has a stable revenue stream and is a regulated business, and he suggested appetite for the offering will remain intact as long as the government acts quickly.
"It depends how long it gets drawn out," he said. "If they do it fairly quickly, there shouldn't be any negative effect. But if it gets delayed by a year or so, the likelihood of this company going public goes down."
pvieira@nationalpost.com; sstewart@nationalpost.com
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