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It's like you've just emerged from a boiler room. That's how it feels to walk through Toronto's financial district with a guy like Lorne Albaum, who runs one of the most reviled companies on Bay Street, TRC Capital Corp., his own one-man show. Those who have dealt firsthand with his money-making scheme, called "unsolicited mini-tenders," have branded it profiteering and predatory--or, conversely, the holy grail of investing. Albaum has found a loophole in securities legislation that has allowed him to fatten his bank account. It may be legal, but his critics--and there is no shortage of them--allege that what Albaum does is annoying, immoral and that he should be stopped. If only the securities regulators cared.
Albaum has an athletic five-foot-ten frame, and he is dressed in a crisp navy suit. He's energetic, even chipper, but his eyes look bleary from too much paperwork. He played baseball as a teen, and you get the feeling he was the kid who knew every player stat down to the smallest obsessive detail. On this late-winter afternoon, 39-year-old Albaum is eating a plate of grilled calamari at a crowded downtown café. As he talks about business, he is amiable and open--somewhat surprising, since he has a talent for attracting controversy.
Albaum's day job is at small Toronto law firm Albaum & Associates, where he has been a securities lawyer since 1992. But he's best known for the company he runs on the side, TRC Capital. Through TRC, Albaum sends out low-ball bids for stock in the form of unsolicited mini-tenders. He's not the only one who's done it--others have operated in Canada and the US--but Albaum's mini-tenders are so frequent that he's made a business out of them. To unsuspecting shareholders, they look like regular tenders, but there are a few differences. First, a conventional tender usually offers shareholders a bid above the stock's market price. Albaum always undercuts the market price slightly--by between 2% and 5%--though in the US, other mini-tenders (not Albaum's) have underbid market value by as much as 47%. Second, Albaum always bids for less than 5% of a company's shares, allowing him to skirt certain disclosure requirements that apply to insiders--including the exact number of shares he actually purchases or later sells. He also reserves his right to withdraw the offer before it closes. There's no way to know what he's bought, if anything, and thus no way to find out exactly how much he has profited from the transaction. But you can be sure he does make a tidy profit. He's been making offers regularly since 1999.
Albaum's mini-tenders are lengthy documents that very closely resemble regular tenders. When dealing with an unsophisticated investor who isn't diligently monitoring the share price, Albaum--who knows securities law inside out--clearly has the edge. "Mini-tenders take advantage of people's ignorance," alleges Russell Hirschhorn, a labor lawyer based in New York who, in the winter of 2000, wrote an article criticizing mini-tenders in the US. "Some people might call that good business, but you're not dealing with a level playing field, and contract principles rely on equal bargaining power."
Hirschhorn is not alone. "I don't see where the socially redeeming value to a mini-tender comes from, or what value there is to anybody except to TRC," says Brian Lynch, a spokesman at the Toronto office of Canada Life Financial Corp., which TRC targeted in February 2002. Barrick Gold Corp.'s vice-president of corporate communications, Vince Borg, was there when a mini-tender hit his company in 2000. "It was very misleading material that was sent," he says. "I recall it was taking advantage of retail investors and the elderly."
None of the criticism fazes Albaum, though. As he carefully chases slippery calamari on his plate, he says with a poker face: "I don't think there's much of a story here."
Albaum started TRC in 1999, when he noticed two separate tender offers that made "something twig in his head." In the first offer, Caisse de dépôt et placement du Québec was looking to buy a bigger stake in Cambridge Shopping Centres Ltd.--a company in which it was already the principal shareholder. Albaum says he figured that would reduce other Cambridge shareholders' liquidity; it would be harder for investors to buy and sell because there was a restricted float. In the second offer, Toronto-based real estate company Gentra Inc. was buying back its own shares. When that offer was completed, Gentra had more shares tendered than it wanted. It decided to prorate the shareholders. If you sold Gentra a block of 100 shares, it was going to pay for 88 and give you back 12--in other words, you would suddenly find yourself the holder of an odd lot of shares. Not a big deal unless you wanted to sell, but then it might not be worth the broker's fee to do so. The Caisse offer to purchase and the Gentra buyback, Albaum says, showed him that "there must be a way to try and do something for these shareholders who don't have a lot of liquidity and also those who are holding small, odd-lot positions." Albaum's solution? Offer to buy the shares at a small discount, but at no commission.
That sounds reasonable--except for one thing. "Companies have odd-lot programs," says Canada Life's Lynch. "We have very few odd-lot holders, by design. When we demutualized [in 1999], everybody got 100 shares or greater. I think many companies have mop-up programs." It's beneficial to have an odd-lot program, in which shareholders are informed of a company's offer to buy back odd-lot shares at current market price for no commission. That means companies can bundle up all the odd-lot shares into lots of 100, which can then be resold to institutional investors.
One international firm that helps companies design such odd-lot programs is Toronto-based Georgeson Shareholder Canada. Glenn Keeling, president and CEO, says he's had just about enough of mini-tenders--and the lack of action on the part of regulators. "I think it's an atrocious situation," he says. "How is this allowed to happen, when the TSX puts me and my firm through so many hoops to do it the right way?"
Albaum insists he's aboveboard, and merely selecting companies that he thinks represent a good long-term investment. "I would do a mini-tender for a company I want to be a shareholder of," he says. If that's the case, he's made some questionable investments. There's no way to tell if he had actually bought any of these shares, but Albaum issued a mini-tender for up to 20 million of Bombardier Inc.'s Class B (TSX: BBD.B) shares at $13.50 in January 2002; it's now trading at $3.05. In May 2002, he offered to buy up to seven million shares, or 3.7%, of Celestica Inc. (TSX: CLS) at $46.25. Today's price range? Try $17 to $18. In August 2002, he offered to buy 1.75 million shares, or 1.64%, of Hershey Foods Corp. (NYSE: HSY) for US$70.25. They now trade in the US$60 range. (He would have had a nice run on Barrick Gold, though. Albaum offered to buy 4% of the company (TSX: ABX), or 15 million shares, in November 2000 at $20. The stock rose to more than $36 last year.)
But why bother with a "long-term investment"? With Albaum's mini-tender strategy, you could make a guaranteed profit by flipping the undervalued stock immediately for the current market price--all without putting up any of your own money. Using a recent tender for Sun Life Financial Services of Canada Inc. as an example, here's how it would work. On Jan. 24, Albaum offered to buy up to five million shares at $28.10--95¢ less than the market price at the time, which was $29.05. His contract says he wouldn't have to pay for the shares until 24 days after the close of the offer. Let's assume he gets all five million shares. If he pays for them right away, he's got to put up just over $140 million of his own cash. But why do that when he could sell the shares for the market price, which would fetch $145 million? That way, he has enough to pay the share sellers (effectively with their own money) and collect a tidy profit of $4.75 million--all before the deadline of 24 days. His contract allows it, and it's guaranteed to make money. However, Albaum denies doing this because, "that would be against the law." But it's not, because his mini-tender contract states that he can delay payment. If you sign it, you agree to it.
Another argument of Albaum's is that he's doing a favor for holders of illiquid stock by offering them a rare chance to sell. But take a look at just a few of the very liquid companies he's targeted in the past--Barrick, Gap, Campbell Soup, Telus, Estée Lauder, Goodyear, Hershey Foods, Sun Life and Canada Life--and that argument, too, rings hollow.
Albaum himself is not forthcoming about his success with the mini-tenders, or the process itself. Both are "proprietary information," he says. But here's how the tender probably works. TRC sends copies of the bid to the issuer and to the Canadian Depository for Securities Ltd. (CDS), which is a pipeline to inform financial intermediaries, such as banks and brokers, about corporate changes. The CDS then sends the details of the offer to all intermediaries. So, TRC doesn't have to do any advertising. It relies on brokers to advise their clients about the offer. Why would brokers advise clients of such a deal? Albaum's mini-tender for Bombardier shares offered brokers an incentive of 8¢ per share or up to $2,000 to find investors who would be willing to sell for Albaum's discounted price. At a time when every broker out there is looking for money, it's an attractive offer. "I think at a bare minimum it's immoral," says Keeling. Ontario Securities Commission (OSC) spokesman Eric Pelletier was unaware of the practice until Canadian Business drew his attention to it. "Wow," he said. "I don't know about that.... But regulators would be concerned with a practice that leads brokers to not act in the best interest of their clients." The CDS, for its part, is just a pipeline, and doesn't do any vetting of the offers. "We leave that to the regulators," says CDS manager of corporate communications Janet Comeau.
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