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Streetwise Will Bay Street's bottom line on Hydro One IPO be low enough for Ontario?

Reportedly, the Ontario government has invited Goldman Sachs Group Inc., Barclays Capital Inc. and the investment banking arms of the big six Canadian banks to make a pitch for the Hydro One business.

Tim Fraser/The Globe and Mail

If the Ontario government thinks it can pay a rock-bottom fee to banks for underwriting the Hydro One initial public offering, it may be disappointed.

Charles Sousa, Ontario's Finance Minister, told Bloomberg News that banks are so hungry for a piece of the action that they would be willing to accept a small slice of their usual fees – say, a quarter of what they earned for IPOs such as Air Canada or Canadian National Railway Co.

His reasoning: The Hydro One IPO is big (worth an estimated $2.3-billion, it could be the biggest Canadian new-stock deal in 15 years), the deal isn't complex and the environment for underwriting is highly competitive right now.

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Plus, Ed Clark, the retired chief executive officer of Toronto-Dominion Bank who is leading the sale, has already said that Bay Street "will see a fee structure that the industry has never seen before."

The government will no doubt seek lower fees in the deal and perhaps even get them. But Mr. Sousa's target may be overambitious.

A former investment banker with more than 30 years of experience on Bay Street pooh-poohed the notion that the Canadian banks will roll over for a chance at selling a piece of the Hydro One IPO.

"The banks will do this as inexpensively as they have ever done anything like this in the past. But they will not do it for nothing," the ex-banker said. He said the minimum fee Canadian banks are likely to accept would be in the 3-per-cent range, half of which would go to their team of retail brokers who would sell much of the stock. Banks are also likely to pick up lucrative extras such as advisory and debt-underwriting fees that won't get as much press as equity-underwriting fees, but will still help fatten their bottom lines, he said.

Reportedly, the Ontario government has invited Goldman Sachs Group Inc., Barclays Capital Inc. and the investment banking arms of the big six Canadian banks to make a pitch for the Hydro One business. The banker said it was "astonishing" that the Ontario government felt the need to invite American banks to be part of the syndicate seeing as the stock is expected to be placed exclusively in Canada.

"It's such evidence of Canadian insecurity that they have something to gain by inviting Barclays and Goldman Sachs," he said. "There's nothing that Goldman Sachs can do that the big Canadian underwriters can't do equally well."

Typically, underwriters charge fees ranging between 4 and 8 per cent of gross IPO proceeds, according to Gowlings. In 2015, Canadian investment banks earned a 5-per-cent fee on the IPO of Cara Operations Ltd. and Fairfax India Holdings Corp., two of this year's high-profile deals. However, some bargaining can be done for particularly large IPOs that feed an investing frenzy.

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Twitter Inc. paid a fee in the range of 3 per cent in its $1.8-billion (U.S.) IPO in 2013. Facebook Inc. did even better, paying as little as a 1.1-per-cent fee in 2012 after raising $16-billion in its IPO.

Apart from being big, these deals also tapped into a particularly strong demand for stocks that provided exposure to the fast-growing social-media industry.

By comparison, Hydro One's main selling feature is its potential dividend yield, expected to range between 3 and 4 per cent.

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