By: Keith M. Summers
I am not an expert on whether or not Hydro One needs new management
or if we would all be better served if Hydro One were not 100 per cent owned by
the people of Ontario. But I do know that for $9 billion, the new shareholders
should get somewhere around 30 per cent of the company, not 60 per cent.
Why is this a bad deal?
Because it is a bad price.
Investment people — like the people who have agreed to help Queen’s
Park unload its majority stake in Hydro One — value companies based upon a
couple of different factors. Sometimes the value of a company is based on the
value of its assets: land, factories, intellectual property, and brand name
recognition. The thinking being that better management of those assets might
generate higher profits. Sometimes the value of a company is based on its
profitability. A stable stream of income is worth paying good money for. Some
companies are valued on their assets, others are valued on their earnings;
sometimes it’s a little of both.
Hydro One is a stable generator of profits. It has been profitable
since it was created out of the breakup of Ontario Hydro. Its profits have
grown by 6.3 per cent per year for the last 14 years. It reported earnings of $749
million for 2014 — all of which belong to the people of Ontario. You and me.
Now, we all know that the province is in debt. $284 billion. That’s
the bad news. The good news is that investors love to buy government bonds.
Investors are so eager to buy Ontario bonds that they compete as to who will
accept the lowest interest rate. In March, bond investors lent Ontario money
for 10 years at a rate of 2.1 per cent. Our average interest rate on all our
existing debt is only 3.8 per cent (and falling).
So, we have some numbers to work with: 1) Hydro One earns $749
million. 2) The province pays, on average, a 3.8-per-cent interest rate on its
outstanding debt and 3) the province can borrow new money at rates as low as
2.1 per cent for 10 years. So here’s the question: how much should we, as
Ontarians, receive for selling this $749-million income stream?
One way to calculate it is to say that $749 million pays all of the
interest on $20 billion in existing government debt at a rate of 3.8 per cent.
So, to accept anything less than $20 billion in cash is a bad deal.
Another way is to say that $749 million will pay all of the
interest on $36 billion of new government debt at a rate of 2.1 per cent. So,
to accept anything less than $36 billion in cash is a bad deal.
The number that doesn’t make sense is $15 billion. That’s the value
that the premier has put on Hydro One. (If 60 per cent is worth $9 billion then
100 per cent is worth $15 billion). That is the number that Bay Street has
convinced the Premier to accept for selling a profitable and growing business
that earns $749 million with an earnings growth rate in excess of 6 per cent.
Why is she doing this?
I don’t know. But I can tell you why Bay Street is pushing this
deal.
Greed. In addition to buying a blue-chip electricity monopoly at a
rock-bottom price, they hope to make money by “underwriting” the deal. They
intend to charge us a fee for selling our Hydro One to themselves at a terrible
price. And a deal of this size could be worth hundreds of millions of dollars
in fees.
I have a lot of respect for investment bankers. They are the guys
(mostly guys, anyway) who help companies “go public” by convincing ordinary
Main Street investors to buy shares in newly public companies. That takes a lot
of work and is not without some risk.
What will not take a lot of work for them and involves no risk is
selling Hydro One at a ridiculous, giveaway price.
This deal is the biggest con I’ve ever seen.
Source:
Keith M. Summers is a former hedge fund manager and was convicted of fraud in 2014.
He is currently serving a three-year sentence. His book, Conned: How Wall Street rips you off
and How to Fight Back will be
published this fall.
