Couche deal has Street humming

The vast number of institutional investors that weren't given a look at the financing. The issuer approached a select number of investors…Following Monday's announcement, the stock enjoyed a sharp run up, which means the buyers who got on board did well.

National Post
October 8, 2003

Couche deal has Street humming
Issuer's approach not meant to 'advantage' certain investors
Barry Critchley

The method used by Quebec-based Alimentation Couche-Tard Inc. to raise $223-million of equity that will be used to help with the company's $1.12-billion acquisition of the Circle K Corp. has the Street talking.

The financing — the issuer sold class B subordinate voting shares — was done through a private placement and bought by a select group of investors. As well, the issuer, in its press release, did not disclose the price per share that investors paid; in the conference call, the issuer said 13.5 million shares were sold, which translates into $16.50 a share.

One market participant, who wasn't offered a chance to take part in the financing, said the approach adopted by the issuer has angered a number of institutional investors. "They should have done a public offering [after the deal was announced], a move that would have given a larger group of investors a chance to participate."

The issuer's decision comes a few weeks after Fortis Inc. adopted a completely different approach.

In mid-September, Fortis announced a $1.36-billion acquisition of two Canadian units owned by Kansas City-based Aquila Inc.

Two weeks later, Fortis announced it completed a major roadshow and that it would raise $350.2-million via the sale of 6.31 million subscription receipts. In that offering a vast number of institutional shareholders participated.

And there are hybrids: last year, Capital Group, a Calif.-based money manager, committed ahead of time to buying $900-million in BCE Inc.'s $2.08-billion common equity financing.

Alimentation Couche-Tard adopted a different approach. It decided to invite a small number of investors into the tent. This has left some investors angry for two reasons:

- The vast number of institutional investors that weren't given a look at the financing. The issuer approached a select number of investors.

When everything was wrapped up, less than two handfuls of buyers got aboard. And contrary to talk that the issuer delivered a Quebec-solution, a source familiar with the deal said most of the buyers weren't based in Quebec.

Alimentation Couche-Tard wanted to raise equity because of its wish to diversify the types of financing that it would use to fund the acquisition. (Diversity isn't always used: last July, for example, Cinram funded its US$1.05-billion acquisition of AOL Time Warner's DVD division with debt.)

But for the chats between the issuer and investors to occur, each investor had to agree to become an insider. In effect, the investors were told about the issuer's plans concerning Circle K and were given some information about the financial merits of the acquisition.

As an insider, the investors couldn't trade on the basis of what they were told. At those meetings, the investors indicated their support for the financing. That support became firm and final when the deal was announced. (In this way the financing was contingent on the deal being announced.)

There is some debate as to when those chats occurred. It is worth noting that the stock has been in the $16.50 range since early September. If the investors wanted to buy their shares at a normal discount to market then the chats may have occurred more recently.

Then again, the price of $16.50 may have been struck to reflect some of the gains that would have occurred if and when the deal was announced. In that case, the chats could have taken place a couple of months back.

- Following Monday's announcement, the stock enjoyed a sharp run up, which means the buyers who got on board did well.

The stock rose almost 23%, which is almost unheard of for an acquisition, especially when the buyer plans to raise equity. (Yesterday, the shares fell 85¢ to $20.15 after trading as high as $22.38 during the day.) In Cinram's case, the stock did pop by 30% on the news and has stayed at high levels since.

- - -

Calls to the issuer seeking a comment were not returned.

However, Laurie Haber, an executive vice-president at National Bank Financial — the firm that acted for Alimentation Couche Tard — did agree to talk

Haber said the approach adopted is a function of the circumstances. "If there is a need to either arrange equity or to firm up the equity ahead of the acquisition, then some equity has to be arranged, and by necessity on a private basis," he said. Haber added that if an issuer needs "certainty" then all the ducks have to be lined up — which means getting equity ahead of time. "The company had the certainty of knowing that it could have its financing in place and the certainty of knowing that it had the right portion of equity in place," he added.

So why arrange the equity portion of the purchase price ahead of time? "By necessity it had to do it on a private basis because of the time frame, risk and uncertainty involved," said Haber, noting the issuer's approach was not done to "advantage" certain investors.

"Given the level of risk and uncertainty involved, they had to do it with a select number of buyers who were prepared to take those risks and commit capital for a period of time," said Haber. "Nobody was being excluded. It was a case of using judgement to find the right buyers in the circumstances," he said.

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