By Andrew Willis
Investment banks are running into headwinds as they attempt to sell $2.5 billion of equity in Manulife Financial, with roughly a quarter of the offering reportedly still unsold as of lunch hour on Thursday.
Manulife launched its second large stock sale in less than a year into a weak market, as the S&P/TSX benchmark is down. That weak tone, along with investor uncertainty over Manulife’s prospects, translated into a relatively slow share sale, despite a hefty 6% discount on the offering.
In contrast, a recent series of large stock issues from Canadian companies, such as a $4 billion (U.S.) outing by Barrick Gold (NYSE:ABX), have all sold quickly.
Manulife sold equity at $19 a share late Wednesday to a syndicate of underwriters led by Scotia Capital and RBC Dominion Securities. The stock closed at $20.18 before the transaction was announced. Manulife stock opened Thursday at $19, the issue price, but has since traded as low as $18.50.
“The tone of the market isn’t great, but no one is worried, this deal will move. Manulife is a quality name with a huge following,” said an executive at one dealer in the selling syndicate over lunch hour. He said roughly $500 million of stock was unsold at the end of the morning.
Part of the problem with this deal is optics. Manulife chief executive officer Don Guloien whipsawed investors by saying as recently as three months ago that selling equity was “the last thing we want to do,” then rolling out one of the largest share offerings ever seen in Canadian capital markets.
Manulife’s CEO has also said the new capital is meant to both shore up the balance sheet and fund potential acquisitions, two very different reasons for diluting existing shareholders.
Manulife is using $1 billion of the capital it raised to pay down a credit facility with the Canadian banks, struck last November, and investment dealer subsidiaries of the banks are responsible for the bulk of the stock sale. Investment bankers say the process signals Manulife is using this cash for internal purposes, not takeovers.
“If Don Guloien is planning an acquisition, he would do the deal, take a bridge loan, then go out on the road, sell the deal to U.S. investors, and then do a marketed stock sale,” said one Canadian investment banker, adding that there are no rumours of Manulife stalking weaker foreign rivals.
The investment banks charged a 3.5% fee on Manulife’s stock sale, so their commission is 66.5 cents per share, or $87 million. That means the Street will avoid a loss as long as it can sell the Manulife equity at $18.33 a share or more.
The volume of trading in Manulife on the TSX is twice Thursday what’s normally seen in the stock, as more than 20 million shares have changed hands.