On Monday, November 4, 2013, Hudson’s Bay Company (“HBC”) completed its previously announced acquisition of all of the outstanding shares of Saks Incorporated (“Saks”) in an all-cash transaction valued at approximately US$2.9 billion. The all-cash transaction was financed by a combination of new debt financing and approximately US$1 billion of new equity issued by way of a bought deal prospectus offering of 16,050,000 subscription receipts and a private placement of common shares and common share purchase warrants.
As can be seen, HBC’s acquisition of Saks relied on multiple methods of financing – debt, a public offering and a private placement. Norton Rose Fulbright Canada acted for the syndicate of underwriters in connection with HBC’s Cdn$275 million bought deal offering of subscription receipts. Particularly interesting is the fact that HBC chose to offer subscription receipts in its public offering as opposed to another type of security. So what are subscription receipts and why are they useful for financing acquisitions?
Public companies can raise capital to finance an acquisition through the sale of subscription receipts that entitle the holder thereof to automatically receive a security of that company upon closing of the acquisition. Essentially, immediately following the closing of the acquisition, the subscription receipts are exchanged into the underlying securities (in HBC’s case, each subscription receipt was automatically exchanged for one common share of HBC). At the time of sale, the subscriber pays in full when the subscription receipt is issued, with the proceeds of the offering being held in trust by a trustee (typically a third party) until such time as the acquisition closes. In the event that the acquisition does not close by a specified date, the subscription receipts are cancelled and the subscriber’s money is returned, with interest.
This type of financing structure is attractive for acquisitions because it ensures that the acquiror has the cash needed to complete the acquisition well in advance of closing, but without the acquiror having to find a way to utilize the additional capital if the acquisition ultimately does not close. This type of financing structure is also attractive for investors because it allows them to invest in a post-acquisition entity while eliminating the risk that the acquisition will not completed. In addition, the short form prospectus and bought deal rules are conducive to these subscription receipt offerings since they permit public companies and underwriters to complete deals relatively quickly and reduce financing risk early on in an M&A transaction.