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Canadian Investors Flock to Lifestyle IPOs as Volumes Surge

June 29, 2017


Canada’s IPO market rebounded following a dismal 2016 as investors look to diversify from financial, energy and materials stocks that dominate domestic indexes.

Nine companies raised at least C$100 million ($77 million) each in initial public offerings year to date, with luxury jacket maker Canada Goose Holdings Inc. the best performer, gaining 59 percent from the offer price, according to data compiled by Bloomberg. That’s a jump from a single comparable deal in the same period last year and more in line with the average of about seven over the previous five years.

The transactions raised some C$3.52 billion, the highest for the first six months since 2006. These include  Kinder Morgan Canada Ltd. — the largest IPO of the year at C$1.75 billion — food chain Freshii Inc., and Jamieson Wellness Inc., which priced Wednesday.

“That’s why these stocks at least initially have done relatively well, because they are different,” said Bruce Campbell, president of Campbell Lee & Ross Investment Management Inc., who bought into Canada Goose, which he subsequently sold, and Freshii, which he still holds. “I think you’re going to see anything quasi-decent come out of the woodwork now because there are guys who’ve been waiting for quite a while. It’s self-fulfilling.”

However, five of the eight currently trading are now below the offer price, including Kinder Morgan, while Canada Goose and Freshii bucked the trend. Jamieson Wellness is expected to start trading next week.

Canada Goose and Freshii were more exceptions than the rule, though. While the Brexit vote and U.S. election roiled markets and deterred IPOs in 2016, this year’s deals have been beaten up in the public markets.

MedReleaf Corp., which was at once the largest pot producer to go public and the worst first-day performance for a Canadian IPO in 16 years, sank 22 percent on its debut amid concern that new regulations would render marijuana stocks overvalued. Oilfield services companies Source Energy Services Ltd. and STEP Energy Services Ltd. were sideswiped by weak oil prices and had to be downsized while BOS Solutions Holdings Inc. shelved its plans.

Kinder Morgan Canada is down 5.3 percent from its offer price as political uncertainty in British Columbia raises questions about the viability of its Trans Mountain pipeline expansion project.

Buyers Become Sellers

“They were effectively in sectors in the market that were experiencing significant volatility and investors were looking for a meaningful margin of safety in terms of where they were willing to participate in those IPOs,” said Kirby Gavelin, head of equity capital markets at the Royal Bank of Canada. “When IPO buyers become sellers, that’s when you have a problem.”

He sees the pace of IPOs slowing somewhat in the second half of the year although markets remain strong and relatively stable.

Sante Corona, head of equity capital markets at Toronto-Dominion Bank, said a strong market isn’t the only reason for the flurry of activity in 2017; there was demand for new names even in 2016 but many of these companies just weren’t ready.

Exploring Sales

Heading into 2017, there was an expectation that the IPO market would be driven by a group of oil exploration and production companies, said John McCartney, head of Global Equity Capital Markets at the Bank of Nova Scotia. Canbriam Energy Inc. and Canadian International Oil Corp. were among those said to be looking to go public.

Many of those names have financial sponsors who still want to monetize their investments and that might see them exploring sales rather than IPOs amid weak oil prices, McCartney said.

“There were probably as many as a dozen names bandied about that might have been an IPO,” he said. “You may see consolidation into the public companies of some of those who were believed to be IPO candidates in a more buoyant market.”

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