(The following article by Barry Critchley was posted on the Financial Post website on July 12.)
TORONTO — The latest example of the way in which Canadian National Railway Co. navigates its investment banking relationships was played out this past week.
The Montreal-based issuer — one of the six Class 1 railroads operating in North America — raised US$800-million via a two-tranche offering: US$300-million of 4.25% five-year debt; and US$500-million of 6.25% 30-year debt. CN expects to receive about US$790-million from the sale of the two debt securities.
The proceeds from the offering will be used to defray part of the costs of two recent CN acquisitions: the railroad and marine holdings of Great Lakes Transportation LLC and BC Rail.
CN’s debt financing — which closed on Friday — was led by Citigroup, the U.S. firm that has been the lead manager on every CN US$ financing since early 2000.
Over that period, CN has been to the markets on two separate occasions: in March, 2003, it scooped up US$400-million while in September, 2001, it garnered US$600-million.
Early 2000 is something of a watershed in the history of CN: in that year, CN officially parted company with its traditional financial adviser, Goldman Sachs.
The reason: in late 1999, CN agreed to purchase Burlington Northern, a major U.S. railroad. On that deal, Goldman acted for Burlington Northern while Citigroup — whose investment banking unit at the time was known as Salomon Smith Barney — acted for CN. Eventually that deal was rejected for regulatory reasons.
Since then Goldman Sachs has been notably absent from every CN financing while Citigroup has been the lead banker on every CN debt financing.
The records show that Goldman Sachs was busy: in June, 1999, it, along with BMO Nesbitt Burns, co led an offering of 4.6 million common shares and US$230-million of convertible preferred shares; and in July, 1998, it led a three-tranche US$925-million debt offering, the proceeds of which were used to help CN purchase Illinois Central Corp.
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While Citigroup has become CN’s main financial advisor, the issuer does its best to keep all the other investment banks interested in providing advice.
One way is through having joint lead managers.
For instance on its most recent financing, JP Morgan was a lead manager. On its March, 2003, financing, Banc of America Securities filed a similar role while on its September, 2001 financing, Merrill Lynch occupied the co-lead manager’s role.
Another way is to ensure that CN has a broad syndicate. On its recent deal, CN named a supporting cast of seven firms. Of the seven, three were Canadian: Harris Nesbitt, Scotia Capital and RBC Capital Markets. In 2003, six dealers supported the work done by Citigroup and Banc of America. Of the six, just one, Scotia Capital, was Canadian. And in its 2001 deal, six firms — one of which, BMO Nesbitt Burns, was Canadian — helped with the distribution.
“They do rotate,” the firms that assist Citigroup,” said one market participant. “That’s their way of paying back the firms for the advise they get.”
CN wasn’t available to discuss its strategy on Friday, It promised to call Monday. However, CN’s practice is consistent with the approach adopted by the other five Class A North American railroads.
Aside from deciding which firm will assist Citigroup in distributing its debt securities, CN rewards the dealers in other ways. One way is handing out mergers and acquisitions assignments.
However, it’s worth noting that on its two most recent acquisitions — the US$380-million deal to purchase Great Lakes Transportation and the $1-billion BC Rail purchase — CN didn’t use an financial advisor.
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A $500-million equity financing is a significant achievement.
Montreal-based Jean Coutu Group Inc. reached that milestone this past week, when it sold 29 million subscription receipts at $17.45 per receipt.
Each subscription receipt grants the holder the right to receive a Class A subordinate voting share. Holders can exercise that right when Jean Coutu’s acquisition of part of the Eckerd drugstore chain closes. That deal was announced a few months back and is slated to close later this month.
Jean Coutu’s issue may end being 15% larger. The underwriters have been offered a 15% over-allotment option. That option wraps up 30 days after the offering closes. If exercised in full, the issue would end up at $582-million.
Of course, Jean Coutu won’t be receiving the gross proceeds. The dealers involved in the sale stand to collect a 4% fee for their work. Merrill Lynch and National Bank Financial led the transaction that will generate $20-million in fees.
As things stand, the issue is larger that what was anticipated when Jean Coutu filed a preliminary prospectus in early July. Then the plan was to raise $475 of equity by selling 26.389 million subscription receipts at an assumed $18 per receipt.
Accordingly Jean Coutu sold more receipts than it planned – but at a slightly lower price. Overall it raised more money than originally planned.