In November 2009, the Toronto Stock Exchange adopted a new rule requiring shareholder approval for the issuance of stock in connection with public company acquisitions if the issuance would result in more than 25% dilution to existing shareholders. Although it is still too early to assess the full impact of the new rule, we expect to see more capital markets activity financing M&A transactions. When making an offer, bidders looking to remove the uncertainty associated with a shareholder vote can undertake a public offering to raise the necessary cash. While such an approach may result in the same level of dilution for an issuer as if it had issued the stock directly to the target’s shareholders, the TSX has made clear that its 25% dilution threshold is not meant to apply to a widely available public offering even if that would result in more than 25% of a listed issuer’s shares being issued. This is not the case with private placements, however, because shares to be issued on a concurrent private placement are taken into account in determining whether the 25% dilution threshold has been triggered.
One benefit for Canadian acquirors is that the Canadian market is well-accustomed to subscription receipt offerings. Subscription receipts will be an attractive structure for acquirors and for investors since this type of offering ensures that the acquiror has the cash needed to complete the acquisition well in advance of closing but without the acquiror having to find a way to deploy the additional capital if the acquisition ultimately does not close.
Viterra used the structure effectively in its successful 2007 hostile takeover bid for Agricore United. Viterra completed three separate public bought deal offerings of subscription receipts, as well as a private placement, between January and April 2007, allowing it to increase the amount of cash offered to Agricore shareholders each time.
In November 2009, Brookfield Infrastructure Partners LP raised C$615.5 million in a public offering of limited partnership units to finance its participation in the recapitalization of an Australia-based publicly traded infrastructure group. That offering involved issuing more units than the limited partnership had outstanding before the deal and did not involve subscription receipts or any condition regarding completion of the underlying transaction. This suggests that some issuers may be able to raise new equity in amounts that would have required securityholder approval had the equity been issued directly as consideration in an acquisition, without having to make the equity raise conditional on the acquisition’s closing. Such cases may be rare since they require a lot of confidence from investors that the acquisition will be completed and that, if it is not completed, management will be able to find alternative means of earning a return on that capital.
Canada’s short form prospectus and bought deal regimes are conducive to the types of offerings noted above; they allow issuers and underwriters to complete deals relatively quickly and reduce financing risk early in an M&A transaction. Expect to see more of these deals as issuers adapt to the new TSX rule. For an in-depth analysis of the impact of the TSX’s restrictions on stock-for-stock M&A deals, please click here.