Fortis Place, in downtown St. John's. U.S. hedge fund Zimmer Partners has invested in a stock sale by the Newfoundland-based utility.Paul Daly/The Canadian Press
For capital-hungry Canadian companies such as utility Fortis Inc., it’s becoming essential to have a friend like Stuart Zimmer.
Mr. Zimmer is founder and chief executive of a US$9-billion hedge fund, Zimmer Partners LP, and his three-decade career has focused on energy companies and utilities. He’s one of an increasingly rare breed of active investors in a stock market that’s now dominated by passive funds. In late November, the New York-based fund manager committed $500-million to a stock sale from Fortis, an order that paved the way for a successful $1.2-billion equity offering.
Newfoundland-based Fortis needed money to help pay for $18.3-billion in planned expansion over the next five years, including renewable power projects such as a US$370-million wind farm in Arizona and $3.2-billion earmarked for natural-gas infrastructure – pipelines and storage tanks – in B.C.
Fortis chief executive Barry Perry first met Mr. Zimmer in 2016, when the Canadian company acquired a Michigan-based utility for US$11.3-billion in cash and stock. Zimmer Partners owned a significant stake in the U.S. company, ITC Holdings Corp., and Mr. Perry pitched the fund manager on exchanging his ITC shares for Fortis shares. The initial overture didn’t work, but the two executives started a conversation that they continued in recent years at conferences and other industry events.
“Stuart and his team have tremendous insight into how our industries operate, and they are known as great shareholders,” said Mr. Perry in an interview. Over time, the fund did build a stake in Fortis. Early this fall, Mr. Zimmer told Mr. Perry that he was open to increasing the size of the position. In November, the Fortis executive decided to take the fund manager up on his offer.
“Our goal was to take the risks of equity financing off the table over the next five years, by accelerating our equity needs today and presenting the market with one large deal,” said Mr. Perry.
Fortis negotiated a $500-million stock sale to Zimmer Partners, then worked with a syndicate of 11 investment banks to sell an additional $690-million of shares for the same price. The public offering sold quickly, a marked contrast to the frosty reception earlier this year for smaller stock sales from companies such as BRP, New Gold and Corus Entertainment. Fortis sold shares for $52.15 each and the stock closed at $53.84 Friday on the Toronto Stock Exchange.
Mr. Zimmer declined to comment on his Fortis investment. The Harvard math graduate keeps a low profile, other than a number of articles highlighting his support for organ donation. In 2005, when he was just 35, Mr. Zimmer receiving a life-changing kidney transplant after his family ran a successful public appeal for a donor.
For Fortis shareholders, dealing with the hedge fund translated into significant savings. The utility paid Zimmer Partners a 1-per-cent “commitment fee,” or $5-million, to do the deal. In contrast, the banks charged Fortis a 4-per-cent underwriting fee, or $27-million.
In investment-banking circles, launching a large transaction with backing from a deep-pocketed fund such as Zimmer Partners is known as doing a “concurrent private placement” alongside a traditional equity offering. In a market that is increasingly illiquid and volatile, these private placements have become a common way to ensure large share sales go smoothly. To date, Canadian companies have looked to a handful of large domestic pension plans for big stock sales. Tapping a U.S. fund such as Zimmer Partners shows foreign-asset managers are also willing to step up for private placements, a welcome development for companies with multibillion-dollar growth plans.
AltaGas Ltd. tapped pension plan OMERS for a private placement as part of a $2.5-billion stock sale two years ago when it needed to pay for a takeover. Last year, two European families that controlled lumber company Stella-Jones Inc. cashed out by selling $876-million of stock, with public investors stepping up for $343-million and the remainder sold privately to a consortium led by the B.C. Investment Management Corp., another public-sector plan.
After the successful stock sale in November, Fortis called off plans to raise up to $1-billion from what’s known as an “at-the-market” financing facility, or ATM. The company also stopped offering investors a 2-per-cent discount on its dividend reinvestment plan. Mr. Perry said the utility no longer needed this equity and wanted to tell “a cleaner story to the market.”
ATM programs are a relatively new approach to selling stock in Canada. An ATM allows a company to bring in cash constantly, by quietly selling small amounts of equity on a daily basis. Eight Canadian companies put ATM programs in place in recent years, including utilities TC Energy Corp., Emera Inc., Algonquin Power & Utilities Corp., along with Aurora Cannabis Inc.
The drawback to an ATM program is the perception that the company will sell more stock every time the price rises, dampening potential stock price rallies. B2Gold Corp. shut down an ATM program last year on these concerns. In a report on Fortis last week, analyst Robert Kwan at RBC Capital Markets said: "We like the decision to terminate the ATM, that helps clean up the story and removes the overhang associated with continuous dribbling out of equity.”
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Andrew Willis