(The following column by Andrew Willis appeared on the Globe and Mail website on July 20.)
TORONTO — Wondering why Canadian National Railway shares are flying when it’s Canadian Pacific Railway that’s the takeover target?
Investors aren’t confused – we hope. The jump in CN’s price on Wednesday – the stock was up 5 per cent – reflected an age-old practice known as rotation, which sees portfolio managers dump one stock from a sector, in this case CPR, and shift their holdings to a rival with greater perceived upside. It was a trade that analysts whole-heartedly encouraged.
Fundamental-focused fund managers, who still count for a great deal of market activity, behaved just the way you’d expect on Wednesday. When CPR shares began trading, after the railway confirmed that Brookfield Asset Management had made overtures, the stock instantly soared by 15 per cent, trading through the day between $88 and $91, a premium to any valuation based on rational measures such as price-to-earnings ratios.
So the fundamental types sold, and the hedge funds rushed in, and more than 7.8-million CPR shares changed hands. While many dealers hid their buying and selling by sending it through the Toronto Stock Exchange’s “anonymous” brokerage account, TSX data show TD Securities and National Bank Financial as leading traders of CPR stock.
In simple terms, CPR sellers had $690-million to reinvest on Wednesday. Many of the fundamental types holding this cash decided that they still liked the idea of owning a railway. There are good reasons for taking this view, as global demand for Canadian resources is rising – freight trains carry these goods – along with improving cash flow and an industry-wide move to give cash back to shareholders.
So as they sold CPR, a great many money managers simply poured their money right back into railways by adding CN to their portfolios.
Reaching for the grail
For Canadian investment banks, doing U.S. deals for U.S. companies is akin to the quest for the holy grail. It’s a worthy, but difficult endeavour.
The Calgary-based energy team at TD Securities got their hands on the grail this week, with the sale of Pogo Producing Co., a Houston-based energy company with a stock that was going sideways.
Among Pogo’s assets was a group of Canadian oil and gas fields known as Northrock Resources, acquired in 2005 for $1.8-billion (U.S.).
Late last year, Pogo attracted the attention of activist investors, with a hedge fund called Third Point taking a stake and launching a proxy battle. Pogo hired Goldman Sachs to advise on its response, and a few weeks later, brought in TD Securities.
The simple approach from here would be to simply sell the whole company in order to appease the activists. But the mixed bag of energy holdings within Pogo led Goldman and TD Securities to opt for a more complicated breakup of the company.
Step one in this process saw Pogo unload Gulf of Mexico properties for $420-million in April. Four weeks later, Northrock was sold to the Abu Dhabi National Energy Co. for $2-billion. The final step played out this week, as Pogo itself was sold for $3.6-billion to Plains Exploration.
While the mandate was shared with Goldman, this is a marquee deal for TD Securities in U.S. energy circles. It also comes at a time when TD is doing all kinds of work for Canadian energy companies, including advising strategic options for several oil sands plays and raising money for pipelines.
This assignment also made for some very happy hedge funds, as Pogo stock is up 32-per-cent since the activists and investment bankers arrived six months ago.
Old friends become new friends
Institutional investors have regarded Tom Astle as a top-ranked tech analyst for years. His new boss, who is also his old boss, is betting Mr. Astle can teach his client-friendly skills to the next generation of analysts.
Mr. Astle stepped down as the tech hardware analyst at National Bank Financial last week to become the head of research at Dundee Wealth Financial. He has also worked at Merrill Lynch. Mr. Astle will be a player-coach, charged with helping to build a mid-sized dealer with big-time ambitions.
The CEO who sold Mr. Astle on this opportunity is Kym Anthony, who used to run National Bank Financial (along with TD Securities) and has brought over a number of former colleagues since joining Dundee early last year.