TORONTO -- It wasn't the best way to kick off a road show. Two days before investment bankers were to begin traversing the country to drum up support for the biggest initial public offering of 2005, Ottawa kneecapped the market.
The deal should have been a relatively easy sell. At the height of the income trust boom last fall, with investors snapping up new offerings as fast as they came, CanWest Global Communications Corp. was converting most of its newspapers to a $700-million income fund.
But the year's biggest IPO soon became one of its toughest deals.
On Wednesday, Sept. 21, with their sales pitch polished and the PowerPoint presentations ready to go, those planning the CanWest MediaWorks Income Fund road show were blindsided by Ottawa's review of the trust sector.
With the federal government mulling whether it needed to begin taxing trusts, the investment banks -- Scotia Capital Inc. and RBC Dominion Securities Inc. -- knew they would be playing to a skeptical audience of investors. What they found, though, was confusion.
Having no clear idea what changes Ottawa had in store, investors were less interested in hearing about CanWest's assets and more worried about discussing the government's potential moves.
"We did get more questions about taxes than we did about the newspapers," said Sarah Kavanagh, managing director and head of Canadian relationship management at Scotia Capital, which led the deal.
One option was to postpone the road show. Investors were fleeing the trust market in droves, causing unit prices to plummet. Betting the turbulence was temporary -- at a time when CanWest was anxious to use the proceeds of the trust IPO to pay down some of its debt -- the sales pitch pressed on.
But if CanWest wanted to cash an IPO cheque, it would have to accept a smaller number. Jittery investors couldn't digest the $700-million size of the offering. The yield needed to be increased as well.
When the trust market began to take back some of its losses at the start of October, a window of opportunity opened and the banks repriced the deal. The IPO was kept at $10 a unit, but the units were cut to 55 million from 70 million. The yield was boosted by more than half a percentage point to 9.25 per cent.
When the dust settled, the changes to the overall value cost CanWest $150-million. The higher yield also comes with a price tag of $5.5-million a year for the fund. And when interest from the retail market slumped, institutional investors were called upon to bolster their stakes to get the IPO moving.
"In retrospect, it's sort of a miracle that we did get [the deal done]," Ms. Kavanagh said. "We basically raised $550-million in the worst market conditions you could have."
Though CanWest took a substantial hit on the offering, it got what it was looking for: breathing room on its debt load. Using the IPO profits, CanWest paid down $400-million worth of its consolidated debt which now stands at $2.6-billion.
At CanWest's annual meeting in Toronto last week, chief executive officer Leonard Asper heaped praise on the banks. The IPO "was completed in the face of massively negative market sentiment. Ours was the only significant IPO that moved ahead on schedule."
© The Globe and Mail
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.
