Equity activity surged in Q1

Canadian equity markets saw a flurry of activity in the first quarter of 2007, as new share issuance soared along with valuations, according to the latest report from the Investment Industry Association of Canada.

Equity issuance totalled $16.7 billion in the first three months of the year, an increase of 44% over Q4, 2006. Common equity accounted for $11 billion, with secondary offerings and private placements accounting for the lion’s share, at $6.1 billion and $4.1 billion respectively.

Issuance of new income trust units totalled $2.1 billion in Q1, marking a significant drop-off in the first full quarter since the federal government announced its plan to tax distributable cash. In the first quarter of 2006, issuance totalled $3.9 billion spread across 38 financings. This year there were just 20.

If income trust issuance was in decline, investors were able to find other sources of income, as $2.5 billion was raised through preferred shares, an increase of 46.2% from the previous quarter and 173.2% year over year.

Fresh issuance was fuelled by continued strength in the resource sector, with energy accounting for over $4 billion and the materials sector bringing another $2.4 billion to the party. Combined, these two made up nearly 60% of the value raised by common equity in the quarter.

Issuance was also driven by the need for fresh capital to fund mergers and acquisitions. TransCanada Pipelines went to market to raise $1.7 billion to pay for a pipeline purchase, while Fortis raised $1.2 billion to fund the acquisition of Terasen.

The strength of issuance, along with the rising valuations on Canadian equities should serve to allay fears of a “hollowing out” of corporate Canada, says IIAC president and CEO Ian Russell.

There have been some calls for tighter control on the markets to limit foreign ownership of Canadian-based companies, but Russell says such a move would be folly.

“Calls to protect Canadian firms are misguided — we cannot deal with the possible downsides of globalization by standing beside the world shouting ‘stop!'” he says. “By restricting foreign ownership, ultimately we would be restricting ourselves. We could be constraining access by Canadian companies to risk capital sometimes only available in sufficient quantities from outside Canada’s borders.”

Dictating limits on foreign ownership would also have a negative impact on share values, which Canadians would feel through the impaired health of their pension plans. The best markets, he says, are free markets.

“Removing the ‘free’ from free markets risks limiting growth,” Russell concluded. “New evidence suggests globalization has actually mitigated the overall severity of volatile economic cycles that over time have sometimes penalized Canadians and Canadian companies.”

Several high-profile deals have given the appearance that the country is losing control of its companies, but a quarterly report out of Crosbie & Company points out that Canadians are more often the buyers than the vendors in cross-border deals, by a factor of three to one.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com