BUSINESS

A FRENZIED PAPER SALE

COMPANIES ARE RUSHING TO TAKE ADVANTAGE OF A STRONG DEMAND FOR NEW-SHARE FLOTATIONS

DEIRDRE McMURDY July 8 1991
BUSINESS

A FRENZIED PAPER SALE

COMPANIES ARE RUSHING TO TAKE ADVANTAGE OF A STRONG DEMAND FOR NEW-SHARE FLOTATIONS

DEIRDRE McMURDY July 8 1991

A FRENZIED PAPER SALE

BUSINESS

When senior executives at Montreal-based Domtar Inc. heard that several rival pulp-and-paper producers were about to issue new shares in their companies last month, they quickly swung into action. Even though the price of Domtar’s shares on the Toronto Stock Exchange had fallen below $9, from an all-time high of $25.75 in 1987, Domtar announced plans to raise $100 million through a new share offering. A similar scene unfolded almost simultaneously at the nearby headquarters of telecommunications giant BCE Inc. That company’s cellular-telephone subsidiary, BCE Mobile Communications Inc., announced a new share offering only a day after its Torontobased competitor, Rogers Communications Inc., unveiled a plan to sell about 20 per cent of its Cantel cellular-phone division to the public. The two Montreal-based giants and their rivals are among more than 35 Canadian firms that have issued new shares recently to cash in on a sudden—and perhaps short-lived—surge of interest among investors in new share issues. Said Domtar corporate treasurer Halford Wilson: “Timing is absolutely critical right now. No matter how attractive your issue, if you are the last guy to the well your stock won’t sell.” The scramble to take advantage of increased public demand has intensified during the past few weeks. In May, Canadian companies issued about $600 million worth of new common stock. Last month, the amount soared to almost $2 billion. In total, Canadian corporations floated more than $3.5 billion worth of new shares during the first half of the year, compared with only $3 billion in all of 1990. Some of them, like Domtar, have been hit hard by the economic recession and are turning to the stock market to raise money in order to reduce their debts. Other firms are issuing shares so that they will have cash on hand to fund growth as the economy recovers.

Investors, ranging from individual stockholders to union-managed pension funds and other large institutions, have their own reasons for wanting to purchase new shares. After a prolonged period on the sidelines after the 1987 stock market crash, many investors have been lured back into the market by falling interest rates, which make the returns on

COMPANIES ARE RUSHING TO TAKE ADVANTAGE OF A STRONG DEMAND FOR NEW-SHARE FLOTATIONS

treasury bills and other fixed-income investments less attractive. At the same time, a shortage of equity issues over the past 18 months has left many small and large investors sitting on pools of cash, heightening demand for new offerings.

Still, the current race to issue new shares is clearly a mixed blessing for many companies. All things being equal, corporate executives would prefer to issue new shares only when the stock market is booming and share prices are strong. In Domtar’s case, however, the company appears to have had little choice but to issue stock at relatively low prices. Domtar lost $294 million on revenues of $2.3 billion in 1990, and it is currently struggling to pay down its $986-million long-term debt.

Although company executives say that they intend to sell off some of their paper and lumber mills to reduce their borrowings, they acknowledge that few potential buyers appear to be interested in the troubled forestproducts industry. Declared Wilson: “We didn’t have many alternatives to raising equity except asset sales, and that’s a tough proposition right now.”

Domtar is not the only company that has felt the squeeze recently as banks review their portfolios of outstanding corporate loans. In some cases, lenders are urging companies to underpin their debt with additional equity, as

Nova Corp. of Calgary did last week when it issued $196 million in common stock for its petrochemical division. And Rogers Communications openly wrangled with its banking group last year, before renegotiating its credit lines earlier this year. Declared Graham Savage, vice-president of finance for Rogers: “Since last fall, we have found credit markets difficult and the terms and conditions much tougher. The credit scene has improved since then, but it’s still not great.” Companies that have managed to weather the economic slowdown are planning to use the money they raise in the stock market to prepare g for future growth. Sherritt o Gordon Ltd., an Edmonton£ based mining company, for

0 one, says that it intends to

1 use the $37 million it raised u by issuing new shares in

March to finance potential acquisitions, now that asset prices are generally depressed. Calgary-based TransCanada PipeLines Ltd., for its part, raised $256 million through a share issue in June and is using the proceeds to expand its North American pipeline network,

enabling it to deliver greater volumes of natural gas to the United States once an economic recovery boosts demand.

The spate of new share offerings has coincided with a revival of stock trading among small Canadian investors. According to Lyle Stein, a portfolio strategist with the Toronto-based brokerage firm Nesbitt Thomson Inc., individual investors began to take a more active interest in the stock market in February, when the annualized rate of return on federal government 90-day treasury bills dropped below what he calls “the magic line of 10 per cent.” Added Stein: “That always encourages investors to accept a little more risk and purchase stocks.”

Small investors were also the most active purchasers of shares in Petro-Canada, which began trading on stock markets last week. The Crown-controlled energy company raised $513.5 million by selling off 39.5 million shares representing 19.5 per cent of the company. But the high volume of trading in Petro-Canada stock last week suggested that many individual investors were unlikely to hang on to their shares for long. The shares closed the week at $12.87, down from an issue price of $13.

In fact, some Bay Street analysts say that they fear that the buoyant mood of investors has propelled the demand for new issues ahead of any sign of improved corporate earnings or cash-flow strength. That could make the entire stock market vulnerable to a downward shift during the next few weeks when earnings reports, which are likely to be poor, will be released for the second quarter of 1991. Says Stein: “There are no fundamental changes in corporate health in sight—it is purely psychology at work, and that can be volatile.” Another concern is that the recent new share issues will soon saturate demand, quenching the flickering signs of a stock market recovery. Warned Brian Steck, chairman of Nesbitt Thomson and the outgoing chairman of the Investment Dealers Association of Canada: “If everyone comes to market at the same time, the window of opportunity will close very quickly.” Rather than waiting, however, many Canadian corporations seem intent on trying to jump through that window before it slams shut.

DEIRDRE McMURDY

BRENDA DALGLISH