In 2011, we were reminded of the old saying that “timing is everything”.
Capital raising activities got off to a strong start early in the year, with U.S. initial public offering (IPO) activity in the first quarter reaching levels not seen since the height of the technology boom in 2000 and high yield debt volume exceeding previous records. While Canada’s new issue activity was more muted in comparison, transactions in the pipeline suggested that 2011 would be a strong year for IPOs and other initial listing transactions. However, this environment changed dramatically with the August downgrading of the United States’ AAA credit rating, coupled with intensifying concerns over European sovereign debt.
Many issuers who planned to access the capital markets after the beginning of August found themselves in a difficult position, faced with less favourable pricing or, for some first time issuers, the prospect of postponing or withdrawing their transactions altogether. It was another reminder that market windows should not be taken for granted.
Challenging Market Conditions for Traditional IPOs
Only nine traditional marketed IPOs involving proceeds over $50 million were completed in Canada in 2011, with none of those transactions closing after the month of August. Despite Canada’s much-publicized financial stability, the events of 2011 demonstrated again that capital raising transactions here remain susceptible to the impact of major international political and economic events.
Given the continued uncertainty as to how the European economic situation will be resolved, we expect that the environment for traditional IPOs will continue to stay soft well into 2012. Last year, we advised first time issuers to “manage expectations”, be flexible with their financing plans and not rely exclusively on a conventional marketed IPO for a financing or liquidity transaction (see Osler Capital Markets Review, 2010). Those recommendations will continue to apply in 2012.
Canadian Capital Markets Perform Well Overall
Despite the low number of traditional IPOs, TMX Group, which operates the TSX and TSX-V, reported 128 IPOs on the TSX and 159 IPOs on the TSX-V in 2011 – another illustration of the extent to which alternative listing methods such as CPC transactions and reverse take-overs have eclipsed traditional IPOs in Canada in recent years. Significantly, TMX Group also reported that 2011 was the third consecutive year that the TSX and TSX-V have led global exchanges in the number of new listings.
There were other bright spots in 2011. For example, the markets were open to REITs and other real estate businesses, which were some of the most active Canadian issuers of equity in 2011. As well, companies going to market represented a more diverse group of industries and were not limited to those in the natural resources and commodities sectors. Despite the volatility that existed throughout the year, market windows for new issues opened at various times over the 12 months, with the result that total equity financing proceeds for both the TSX and the TSX-V were actually higher in 2011 than in 2010.
Using the Canadian Capital Markets as a Platform for International Growth
Certain transactions highlighted the potential to take advantage of more favourable market conditions in Canada in order to finance assets or operations abroad. For example, we saw a new spin on an old concept with IPOs by Eagle Energy Trust and Parallel Energy Trust. These transactions revived the Canadian income trust structure to acquire and hold oil and gas assets located entirely outside Canada – thus avoiding the application of Canadian SIFT taxation rules. This structure was extended to the real estate sector with the IPO of Dundee International REIT. This offering, which was completed in early August as market conditions began to deteriorate, was the largest ever Canadian real estate IPO in terms of total funds raised from the public. In addition to being notable for where the REIT’s initial portfolio of real estate was located (Germany, in that case), the transaction also demonstrated that a Canadian IPO could be used as a structure to partially finance the acquisition of assets from a third party seller, making this an alternative to a traditional acquisition by a strategic purchaser. More generally, these offerings were examples of Canadian management teams using the Canadian capital markets to develop international opportunities – marrying Canadian intellectual capital and financial capital to “go global”. However, for these and other issuers who managed to complete their financings while the market window was open, good timing was also important.
Swisher Hygiene Inc., a U.S. business providing hygiene and sanitation products, took a different approach in order to access the Canadian markets. Swisher acquired Canadian public company CoolBrands International Inc. in a reverse take-over in late 2010. The Swisher transaction allowed a private U.S. business to access capital through a Canadian exchange listing as the first step in a strategy that would see Swisher ultimately become a U.S. public company. After completing its reverse take-over, Swisher redomiciled as a Delaware corporation, obtained a NASDAQ listing in early 2011 and completed several financings and acquisitions using its stock as currency. Swisher is now one of the largest U.S. businesses to be listed on the TSX and, in 2011, was cited by the Wall Street Journal as the most acquisitive company in the United States.
Greater Regulatory Scrutiny of Foreign Businesses
While the TSX and TSX-V continue to attract listings from international issuers, several high profile incidents in 2011 did put a spotlight on issuers with foreign assets. The OSC’s investigation of Sino Forest and Zungui Haixi (the Chinese maker of sportswear and footwear), together with the SEC’s approval of new rules for companies entering the U.S. market by way of reverse merger, highlighted some of the regulatory challenges associated with foreign businesses. These incidents are sure to result in greater regulatory scrutiny of any first time issuer with significant assets outside North America. Nevertheless, they should not obscure the most important reason why a reverse take-over or other alternative listing transaction should be considered by an issuer – they are less susceptible to changes in market conditions as compared with a traditional IPO. In uncertain times, issuers seeking a liquidity transaction should keep all options on the table.