A U.S. hedge fund called Telus’s plan for a single class of common shares one of Canada’s “worst” share collapse deals in years, saying there must be compensation for voting shareholders.
Mason Capital Management and Telus are locked in battle over the Canadian company’s plan to convert its dual-class share structure of common shares (TSX:T) that have voting rights and non-voting A shares (NYSE:TU).
The New York-based investment firm said Thursday it wants to protect the value of voting shares, a message it has delivered to the Vancouver telecom company for months.
“This is one of the worst share collapse deals for voting shareholders in Canada since at least the year 2000,” said Michael Martino, principal and co-founder of Mason Capital.
Mason Capital said it believes a conversion ratio of 1.08, or an eight-per-cent premium, would be appropriate under the share conversion plan.
“Our view is that there’s no noticeable value and the voting shareholders just lose,” Martino told a conference call.
“Even if there were some value created by the share collapse, it’s our view is that it has to be shared appropriately. It all can’t just go or predominantly go to the non-voting shareholders.”
The hedge fund defeated Telus’s plan last spring to convert its non-voting shares on a one-to-one basis.
Telus chief financial officer Robert McFarlane said the company isn’t offering a premium for the share conversion because both classes of shareholders will benefit.
“It will benefit both the voting and the non-voting shares by combining the liquidity and the marketability of the shares, leading to a listing of the voting shares for the first time on the New York Stock Exchange,” he said.
Mason Capital owns about 19 per cent of Telus’s voting stock, making it the largest voting shareholder. But Mason has also disclosed that it has short sold the company’s non-voting shares. Short sellers make a profit when the stock price falls.
Martino also said the hedge fund is legally challenging Telus’s assertion that 50 per cent — not two thirds — of voting shareholders need to support its share conversion proposal.
At the Oct. 17 meeting, Telus will need to garner two-thirds support from non-voting shareholders. However, the threshold for voting shares has been lowered from two thirds to half, which should make it more difficult for Mason to block it again, Telus has said.
Mason is appealing another decision that prevents it from holding a meeting for only Telus voting shareholders on Oct. 17. That case will be heard next Thursday.
Mason also said consolidating the two classes of shares — voting and non-voting — will not create value for all shareholders.
During the call, Mason said Telus’s management team and board of directors, who collectively own significantly more non-voting than voting shares, stand to make more than $4 million from the dual class conversion at the expense of voting shareholders.
McFarlane said when the share conversion plan was announced last February the shares prices of both classes went up and have increased even more since then.
“So it shows that it’s a benefit to both classes of shares. Lastly, it’s consistent with good corporate governance where one share gets one vote,” he said from Vancouver.
Mason has slightly reduced its position in Telus — by two million shares — and McFarlane said it could be a sign of things to come.
“I would say it indicates that Mason is expecting to lose the vote. They’re reducing their economic exposure.”
The various legal challenges by Mason shows “they’re trying to throw spaghetti against the wall to think of any reason why you can drive the spread between the two (classes) wider because that’s how they make money.”
McFarlane said he wouldn’t be surprised if Mason comes up with more legal manoeuvres.
“These are New York hedge fund guys about to lose a lot of money and reputations have been tarnished so they’ve got the full court press. But we’re confident that we will be successful.”
Shares in Telus closed down 27 cents at $62.16 on the Toronto tock Exchange, while non-voting shares on the New York Stock Exchange closed up 26 cents to $62.95.