Was the Manulife/CIBC Deal Leaked, and Why?

Last month, a few of us raised the notion that CIBC (CM) would be tapping the equity markets before too long. I had Manulife Financial (MFC) as the player (see “Will Manulife come to CIBC’s rescue?“, December 19, 2007), and according to various newswires, Manulife has indeed stepped up to help fix the Commerce’s balance sheet. But it has some company, so this isn’t the “strategic investment” I thought might be coming. A C$2.75 billion deal all told, which represents more than 10% of the market cap of CIBC. C$750MM of it is going to passive institutional investors, just to keep the wolves at bay.

The only way to make the situation worse for CIBC’s executives would have been to issue all of this “cheap” equity to the five principal investors, which included OMERS, Manulife and CDP. That said, the public investors will still pay C$1.79 more for their shares (C$67.05) that the large institutional private placement subscribers (C$65.26); the large difference likely being a function of the CIBC’s share price when the two deals were negotiated.

Either way, it’s a nice discount to the C$72.07 close at 3 p.m. on Monday, and with the equity offering closing in 10 short days, the investors that were lucky enough to get the stock at C$67.05 will be able to sell it on January 21st (with a 3-day settlement) for a nice profit (assuming the shares hang in here at C$72), having never put up a dollar.

Lots will be written in the coming days about the merits of this transaction. Who should be blamed, and whether or not this is the absolutely last shoe to drop at 199 Bay Street. It’ll all blow over, of course, and CIBC’s board was right to fix this.

In the meantime, one has to wonder whether or not the deal was leaked in the last 30 minutes of trading before the stock was halted. CIBC shares had fallen throughout the day on Monday, and were down more than a buck from C$72.15 to C$70.92. And then, from 2:30 p.m. to 3:02 p.m. when it was halted, it shot back up to C$72.07 on some decent volume.

This was not the trading pattern that the rest of the sector experienced.

On the day, Toronto-Dominion (TD) was down 2.5%, Bank of Nova Scotia (BNS) about 2%, and Royal Bank of Canada (RY) about 1%. All while the Dow and TSX rallied. The Bank of Montreal (BMO) broke ranks and was up 1%.

One has to wonder if the equity offering was leaked. The recent U.S. experience to date has been that once the bad news is press released, the equity raised or the write-offs taken, the bank is question sees its stock rally. That’s what the buyers - if they heard something - would be expecting today, even if CIBC’s share offering was at a 6% discount to the market.

It has been said before, and will be said again: our market looks to be leaky, leaky, leaky.

But it is worse than that, as the CIBC told us all a few months ago that its subprime problem was nothing more than a $330 million annoyance (see post “When $330 million of subprime becomes $1.7 billion at CIBC,“ November 13, 2007). On Monday, it turned out to be a problem that could only be solved via a C$2.75 billion equity offering.

The appearance of a leak isn’t the real crime, its the bank’s own disclosure that deserves close regulatory scrutiny.