Initial public offering market in Canada booming: McCarthy Tétrault’s capital markets co-head

At least 32 Canadian firms have announced IPOs this year, set to raise a combined $3.26 billion

Initial public offering market in Canada booming: McCarthy Tétrault’s capital markets co-head
Patrick Boucher partner and co-head, national capital markets practice at McCarthy Tétrault LLP

The market for initial public offerings has become so busy lately, says McCarthy Tétrault partner Patrick Boucher, that it’s not unusual to see three come on stream each week.

“There’s a huge appetite for buying new public companies, especially in key sectors,” says Boucher, who is partner and co-head of the firm’s national capital markets practice, based in Montreal. “Three years ago, we were lucky to see three IPOs come on stream in a year. Now it’s not surprising to see three each a week.”

Surging equity markets and a blossoming technology sector are fueling the biggest first-quarter crop of initial public offerings by Canadian companies in 15 years. This year, at least 32 Canadian firms have announced IPOs set to raise a combined $3.26 billion, according to Bloomberg’s data.

According to Bloomberg, that total is more than ten times the $305.2 million in IPO deals announced by this time last year, the most for a first quarter since 2006, when $3.58 billion of public offerings were announced.

Boucher, who is co-head of the national capital markets practice at McCarthys, says, “anything relating to technology, or lithium, or clean energy, there’s a huge appetite, a really huge appetite, to bring good companies in interesting sectors to the public market.” He notes that in recent years there has been strong investor interest in new public companies, the inventory of IPOs to take part in was small.

“Now we’re seeing many companies take advantage of this window to raise capital through an IPO,” he says, adding that risks related to Covid-19 may still exist. Still, there is a “level of comfort” that vaccines will stop the pandemic relatively soon.

This year’s most significant deals so far are information-technology company Telus International CDA Inc.’s $1.06 billion IPO, with the shares trading since February, and space robotics and satellite firm MDA Ltd.’s $500 million planned offering, announced last week.

Farmers Edge Inc, which uses data and artificial intelligence to boost crop yields among newer tech companies, raised $143.8 million in an offering in February. Dialogue Health Technologies Inc., which operates a virtual healthcare and wellness platform, announced a $100 million IPO last month.

As for the size of IPO deals, Boucher says there is a wide range, “but you’re talking about real deals, with some involving market caps over $1 billion, and many at least with market caps of $100 million.”

Boucher adds that in addition to a traditional IPO, with companies finding an underwriter and getting a listing on the TSX or Nasdaq, for example, “we’re also seeing an increase in IPOs using Special Purpose Acquisition Corporations (SPACs), often known as ‘blank cheque’ companies.”

These are different from reverse takeover IPOs when a company goes public by taking over a shell company with no current operations but is traded publicly on an exchange such as the junior Venture Exchange, says Boucher. SPACs are essentially shell companies that don’t have business plans of their own but instead look for private companies with a desirable business plan.

While SPACs have been around for decades in the United States and have been in Canada since 2015 (though the rules guiding them here first came out in 2009), they have gone through waves of popularity.

Boucher says SPACs are becoming a popular investment vehicle again, given some unique features. For one, SPACs may often sit around with no business vehicle until the right one comes along — and that might take a few years. Another feature is that successful investors (called a sponsor group) often put SPACs together, and they will have a keen nose for what is hot.

And finally, once those who came up with a particular SPAC have found their ideal business, those who put money into the deal have a chance to vote on whether they want to continue to participate. If they choose not to, for any reason, they can get their capital back, though potentially subject to a “very minimum discount.”

There may also be a limit on how many investors can get their money back because, Boucher says, “a minimum amount of money is needed by the sponsors to go ahead with the business plan.”

Typically, the money invested in a SPAC goes into an escrow account, and the sponsor has two years to use the money for a “qualifying transaction.”

Boucher mentions as an example of a SPAC IPO the electric bus maker Lion Electric, gearing up to go public through a reverse merger with Northern Genesis Acquisition Corp. The SPAC raised about $300 million. The two companies will likely announce an IPO date after the merger deal closes.

The other SPAC McCarthy has worked on is Li-Cycle Corp., a lithium-ion battery recycling company based in Mississauga, Ont. It has an agreement with Peridot Acquisition Corp. (NYSE: PDAC), a special purpose acquisition company sponsored by Carnelian Energy Capital, to enter into a business combination agreement that will result in Li-Cycle becoming a public company. That deal has not closed yet either.

Boucher says that while IPOs have increased in popularity, it’s not unusual to see companies wanting to raise capital to run a dual process, tapping the public markets and running an auction process on the private equity side.

“The current shareholders will evaluate the two routes,” he says. “What is the valuation multiple being put on the table? Is it worthwhile to go the IPO route and then sell part of the shares in a secondary offering down the line?”

He points out that Montreal-based payment technology provider Nuvei Corp., the biggest Canadian tech IPO of 2020, completed a secondary offering in mid-March so that the founders and others could monetize a portion of their stakes at an even higher valuation than when it went public.

Boucher, whose firm acted on behalf of dealers involved in Nuvei, raised more than $550 million in the secondary offering.

Boucher says that investment bankers advise firms on ways to raise capital, while a law firm’s role is to assist business clients on the available alternatives and the best ways to meet their goals with the least amount of risk.

“Once they fully understand the available alternatives, our role is to bring them to their goal, reducing risk and closing loopholes,” he says. And if, for example, you are a tech company, you want to make sure your intellectual property is adequately protected.

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