Three of Canada's largest institutional investors have joined the fight against a controversial plan by Magna International Inc. to buy out Frank Stronach's controlling stake, but the company fired back Wednesday, arguing that the deal will still pass if shareholders are allowed to vote on it.
British Columbia Investment Management Corp., which owns 1.4 per cent of Magna's class A shares, said Wednesday it will vote against the $863-million (U.S.) offer to Mr. Stronach, as will Alberta Investment Management Corp. and the Ontario Municipal Employees Retirement System, according to sources at the investment firms. They join the Canada Pension Plan Investment Board, the Ontario Teachers' Pension Plan and Montreal-based investment firm Letko Brosseau & Associates Inc. in publicly opposing the deal.
The opposition by the three firms, which combined manage about $200-billion in assets, mostly on behalf of provincial or municipal employees in those provinces, comes as lawyers and shareholders on both sides of the heated debate get ready for a crucial Ontario Securities Commission hearing next week.
The OSC said Tuesday that it will consider whether the deal should be halted because the proposal is "abusive" and shareholders have not received enough financial analysis of the offer. The commission complained that there was no independent fairness opinion provided for investors, and two reports prepared for the board by advisers at Canadian Imperial Bank of Commerce and PricewaterhouseCoopers have not been released to shareholders.
Magna's board is expected to release the CIBC report as early as Thursday, sources said Wednesday. They said the report concludes that Mr. Stronach is receiving a "significantly" larger premium than other comparable deals. One person familiar with the report said it would shed little additional light on the buyout, however, because CIBC was only asked to compare the transaction with other conversions of dual-class shares.
Mike Harris, Magna's lead director and head of the special committee of the board, said CIBC was asked to provide a formal fairness opinion, but declined.
"The committee knew that there may well be criticism of the proposal ... but the committee felt this was not reason enough to mothball the proposal," Mr. Harris, the former Ontario premier, said in an e-mail Wednesday. "The committee also believed that if the opposition was sufficient - rather than a vocal minority - then shareholders would vote the proposal down and the status quo would prevail." Magna shareholders are scheduled to vote June 28.
One of Magna's largest investors, Goodman & Co. Investment Counsel Ltd., is siding with the company, saying the OSC should leave the decision in the hands of shareholders.
"It's not a complex transaction, and it's one that shareholders are educated enough to make a decision on," Goodman portfolio manager David Taylor said Wednesday. "I think at the end of the day the fairest process is to let shareholders vote and if you don't like the deal, then sell your stock or hold on and vote against it. I can't think of anything fairer than that." Goodman owns about 4 per cent of Magna's class A shares.
Magna has offered to exchange Mr. Stronach's dual-class shares for nine million class A shares and $300-million (U.S.) in cash, valuing his shares at $1,187 each, or an 1,800-per-cent premium above the value prior to the announcement of the offer. Mr. Stronach would also receive a stake in a joint venture with Magna that would develop components for electric vehicles.
Magna's chief financial officer, Vince Galifi, said Wednesday that the company could release both the CIBC and PwC reports, but they will not sway any shareholders to vote either for or against the deal. He added that there is confidential customer information in the PwC report on Magna's electric vehicle business that would have to be excised if it were to be made public.
Mr. Taylor said he believes the CIBC report is unlikely to reveal much investors don't already know about the deal.
"We all know it's expensive," he said. "But we also know it's expensive to own a stock that trades at a massive discount that should be trading at a premium. ... We know the benefit far exceeds the cost."
Magna said Wednesday that more than 24 per cent of its shares have been voted so far on the offer, and of those, the vote is 99 per cent in support of the deal. The company said it has given complete disclosure to investors about the offer and followed proper process in preparing the deal.
Mr. Galifi said the rise in the value of Magna's shares since the transaction was announced on May 6 has proved that a discount on Magna's stock will be lifted if the deal is concluded and Mr. Stronach's control is removed.
Magna's shares closed at $62.63 (Canadian) on May 5, the day before the transaction was announced. Since then, the shares have traded as high as $78. They closed Wednesday at $69.30 on the Toronto Stock Exchange, losing $4.06 on the first day of trading after the OSC announced it would intervene. That was the largest decline for the shares in more than a year.
Doug Pearce, chief executive officer of B.C. Investment Management Corp., which is part of the group seeking intervenor status before the OSC, said the payment to Mr. Stronach is excessive, and it could set a dangerous precedent for other buyouts of dual-class shares.
"I worry that other dual-class founders will follow, and that could be a large dollar amount taken from other common shareholders, and be negative to the Canadian market reputation," Mr. Pearce said.
Magna's board is coming under growing criticism for declining to give any guidance to shareholders about the transaction. "They have not provided any information to the shareholders that they really need." said Ermanno Pascutto, executive director of the Canadian Foundation for Advancement of Investors Rights (FAIR), which complained to the OSC about the transaction.
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