Hydro One Transaction Details
In addition to the base offering of 72,434,800 common shares, Ontario granted an over-allotment option to the underwriters to purchase up to an additional 10,865,200 shares, representing about 15 per cent of the base offering.
Over-allotment options to purchase additional offered shares are typically granted to underwriters in a public offering. The number of additional shares that can be purchased is limited to 15 per cent of the base offering, and the option must be exercised in whole or in part within 30 days of the closing date for the base offering.
The difference between the number of shares agreed to be sold in an over-allotment option (in this case up to an additional 10,865,200 shares) and the base offering amount (in this case 72,434,800 shares) is called an over-allocation position. This over-allocation position allows the underwriters to engage in limited market stabilization, in accordance with securities law restrictions, to deal with the increased liquidity in the market following the offering.
The over-allotment option shares are sold to the underwriters at the same price as the base offering: $23.65. These shares are then used to cover sales to institutional and retail investors who have placed orders to purchase Hydro One Limited common shares with the underwriters.
Hydro One Limited common shares were acquired from Ontario and sold by a group of underwriters led by RBC Capital Markets and Scotiabank. The underwriters agreed to buy the offered shares at fixed price in advance of conducting any marketing, with a firm commitment offering. This type of transaction transfers market risk to the underwriters from the selling shareholder. As a result, underwriters in firm commitment offerings negotiate an offering price at a discount to the prevailing market price, where the underwriters judge investor demand will be sufficient to place the offering.
The offering price was $23.65 per share representing a 2.1 per cent discount to the market closing price on the day of launch. This is lower than the typical discount provided on a firm commitment offering as shown in the table below.
Underwriting fees were calculated as a percentage of sales to investors. The fees earned by the underwriters for the secondary share offering are 1 per cent for sales to institutional investors and 3 per cent for sales to retail investors, subject to a maximum of 2 per cent.
This is significantly lower than what underwriters have typically earned on firm commitment offerings.
Recent Firm Commitment Offerings in Canada
As shown in the chart below, Ontario has achieved a significantly lower discount and fee structure than in recent firm commitment transactions in Canada.
Ontario achieved a 2.1 per cent discount and underwriters will earn 1 per cent for sales to institutional investors and 3 per cent for sales to retail investors, subject to a maximum of 2 per cent.
|Closing Date||Issuer||Size (M)||Discount (%)1||Fee (%)|
|20-Apr-16||Enbridge Income Fund Holdings||$500||5.1||4.00|
|14-Apr-16||Hydro One Ltd.||$1,713||2.1||1-3.002|
|07-Apr-16||Silver Wheaton Corp.||US$500||5.9||4.00|
|05-Apr-16||Tourmaline Oil Corp.||$244||4.9||4.00|
|29-Mar-16||Pembina Pipeline Corporation||$300||4.3||4.00|
|04-Mar-16||Kinross Gold Corporation||$250||5.7||4.00|
|02-Mar-16||Fairfax Financial Holdings Limited||$735||4.0||4.00|
1 The discount may be calculated using a variety of methods.
2 This represents a split fee structure for institutional and individual investors, subject to a maximum of 2%. Other transactions listed are a flat fee for both.