November 27, 2020

Deal Professor: A Hedge Fund’s Complex Scheme May Cost It Millions

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Harry Campbell

Hedge funds are supposed to be the smart money, but sometimes even they can be outsmarted.

Take the case of Mason Capital Management and the Telus Corporation, a large Canadian telecommunications company. Mason Capital, a New York and London hedge fund with about $8 billion in assets under management, has made a complex bet in Telus stock that looked shrewd at first, but that may now lose tens of millions of dollars.

Telus has two classes of shares, one that is voting and trades only in Canada and another that is nonvoting and trades in Canada and the United States. The nonvoting shares traditionally trade at a discount to the voting shares, but Telus is proposing to convert the shares on a one-for-one basis, giving a windfall to the holders of nonvoting shares.

Mason has taken a complex trading position in opposition to the proposal. In April, the hedge fund announced that it had acquired 19 percent of Telus’s voting stock, worth 1.9 billion Canadian dollars, or $1.8 billion.

Mason was able to finance this position by setting up a roughly equivalent short position in Telus’s nonvoting common stock, betting that those shares would fall. Basically, for every dollar that Mason earned on the voting shares, it would lose a dollar on the nonvoting shares. Since Mason is almost perfectly hedged, this was a bet that Telus’s proposal would fail, causing the nonvoting stock to lose value and the voting stock to gain.

Pretty clever, right?

Mason has no real economic interest in the future of the company because of its offsetting positions, but it can still vote its 19 percent against the share conversion proposal. This anomaly has led Telus to claim that Mason is an “empty voter” — voting shares in which it has no economic interest “at the expense of other shareholders.”

The hedge fund has argued that Telus is seeking to hand the nonvoting shareholders free money by collapsing the shares at a 1-to-1 ratio instead of at the traditional discount.

According to Mason, “over the past 13 years, Telus voting shares have traded at an average premium of 4.83 percent relative to the nonvoting shares; the premium has been as high as 15.23 percent.” The hedge fund also argues that the Telus directors who approved this transaction are conflicted because 89 percent of their total holdings are in the nonvoting shares.

In response, Telus claims that the lack of a discount is justified because the voting shares would get additional liquidity.

Mason won Round 1 of this argument in May, when Telus withdrew its proposal.

At the same time, Telus also planted the seeds to thwart Mason’s trade. The company announced that it would try again to collapse the shares at some future time. This gave price support to the nonvoting shares and prevented Mason from cashing out its position.

Mason reportedly hired the Blackstone Group to look at strategic alternatives for its Telus stake, but was unable to sell it.

In August, the fund sought to press the issue by calling a shareholder meeting to amend Telus’s charter to prevent the nonvoting shares from being converted into voting shares without a discount.

This started Round 2.

Telus again proposed that the shares be collapsed. But in a twist, the company has structured the transaction so that only a majority of the voting shares are needed to approve it, instead of the 66 2/3 vote initially required. The reduction in the number of necessary votes gives the proposal a much better chance of passing despite Mason’s 19 percent holding.

Telus also refused to hold a special meeting. The battle came before the Supreme Court of British Columbia, and on Sept. 11, the court rejected on technical grounds Mason’s effort to force Telus to hold the meeting. But in an aside, the court heavily criticized the hedge fund for its voting strategy, calling it “empty voting.” The court stated that “the practice of empty voting presents a challenge to shareholder democracy … when a party has a vote in a company but no economic interest in that company, that party’s interests may not lie in the well-being of the company itself.” Mason has appealed the ruling.

Unless a higher court intervenes, the share collapse is heading to a shareholder vote on Oct. 17. Given that only a majority vote is needed, Telus may have the votes necessary to push the measure through.

And with the decision of the Canadian court, other hedge funds appear to have closed out their positions in Telus, further narrowing the spread between the share classes.

On paper, Mason’s trade was a deliciously clever scheme that made perfect sense. But once the trade went public, its position in Telus raised eyebrows. Mason has argued that it is not an empty voter because its interests are aligned with the voting shareholders; the conversion will be at their expense. That message may make sense, but the messenger has been viewed with suspicion. As a result, Mason has had a hard time persuading Canadian shareholders to support it.

And with the nonvoting shares still holding on to their earlier gains, Mason finds itself boxed in. Telus’s total market value has increased by $2 billion since February. Mason would have made much more money — hundreds of millions, in fact — had it simply taken a long position.

Lost in all of this maneuvering are the economic merits of Telus’s share collapse and the fact that nonvoting shares do appear to be getting a significant benefit that may be inappropriate.

According to sources close to Mason, the trade is currently profitable. But Mason is finding that its ingenious trade may lose it millions, thanks to the equally adroit maneuvering of Telus. Who said Canadians were too nice?


Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

Article source: http://dealbook.nytimes.com/2012/09/25/hedge-funds-complex-scheme-may-backfire-costing-it-millions/?partner=rss&emc=rss

Deal Professor: Hedge Fund’s Complex Scheme May Backfire, Costing It Millions

Harry Campbell

Hedge funds are supposed to be the smart money, but sometimes even they can be outsmarted.

Take the case of Mason Capital Management and the Telus Corporation, a large Canadian telecommunications company. Mason Capital, a New York and London hedge fund with about $8 billion in assets under management, has made a complex bet in Telus stock that looked shrewd at first, but that may now lose tens of millions of dollars.

Telus has two classes of shares, one that is voting and trades only in Canada and another that is nonvoting and trades in Canada and the United States. The nonvoting shares traditionally trade at a discount to the voting shares, but Telus is proposing to convert the shares on a one-for-one basis, giving a windfall to the holders of nonvoting shares.

Deal Professor
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Mason has taken a complex trading position in opposition to the proposal. In April, the hedge fund announced that it had acquired 19 percent of Telus’s voting stock, worth 1.9 billion Canadian dollars, or $1.8 billion.

Mason was able to finance this position by setting up a roughly equivalent short position in Telus’s nonvoting common stock, betting that those shares would fall. Basically, for every dollar that Mason earned on the voting shares, it would lose a dollar on the nonvoting shares. Since Mason is almost perfectly hedged, this was a bet that Telus’s proposal would fail, causing the nonvoting stock to lose value and the voting stock to gain.

Pretty clever, right?

Mason has no real economic interest in the future of the company because of its offsetting positions, but it can still vote its 19 percent against the share conversion proposal. This anomaly has led Telus to claim that Mason is an “empty voter” — voting shares in which it has no economic interest “at the expense of other shareholders.”

The hedge fund has argued that Telus is seeking to hand the nonvoting shareholders free money by collapsing the shares at a 1-to-1 ratio instead of at the traditional discount.

According to Mason, “over the past 13 years, Telus voting shares have traded at an average premium of 4.83 percent relative to the nonvoting shares; the premium has been as high as 15.23 percent.” The hedge fund also argues that the Telus directors who approved this transaction are conflicted because 89 percent of their total holdings are in the nonvoting shares.

In response, Telus claims that the lack of a discount is justified because the voting shares would get additional liquidity.

Mason won Round 1 of this argument in May, when Telus withdrew its proposal.

At the same time, Telus also planted the seeds to thwart Mason’s trade. The company announced that it would try again to collapse the shares at some future time. This gave price support to the nonvoting shares and prevented Mason from cashing out its position.

Mason reportedly hired the Blackstone Group to look at strategic alternatives for its Telus stake, but was unable to sell it. In August, the fund sought to press the issue by calling a shareholder meeting to amend Telus’s charter to prevent the nonvoting shares from being converted into voting shares without a discount.

This started Round 2.

Telus again proposed that the shares be collapsed. But in a twist, the company has structured the transaction so that only a majority of the voting shares are needed to approve it, instead of the 66 2/3 vote initially required. The reduction in the number of necessary votes gives the proposal a much better chance of passing despite Mason’s 19 percent holding.

Telus also refused to hold a special meeting. The battle came before the Supreme Court of British Columbia, and on Sept. 11, the court rejected on technical grounds Mason’s effort to force Telus to hold the meeting. But in an aside, the court heavily criticized the hedge fund for its voting strategy, calling it “empty voting.” The court stated that “the practice of empty voting presents a challenge to shareholder democracy … when a party has a vote in a company but no economic interest in that company, that party’s interests may not lie in the well-being of the company itself.” Mason has appealed the ruling.

Unless a higher court intervenes, the share collapse is heading to a shareholder vote on Oct. 17. Given that only a majority vote is needed, Telus may have the votes necessary to push the measure through. And with the decision of the Canadian court, other hedge funds appear to have closed out their positions in Telus, further narrowing the spread between the two share classes.

On paper, Mason’s trade was a deliciously clever scheme that made perfect sense. But once the trade went public, its position in Telus raised eyebrows. Mason has argued that it is not an empty voter because its interests are aligned with the voting shareholders; the conversion will be at their expense. That message may make sense, but the messenger has been viewed with suspicion. As a result, Mason has had a hard time convincing Canadian shareholders to support it.

And with the nonvoting shares still holding on to their earlier gains, Mason finds itself boxed in. Telus’s total market value has increased by $2 billion since February. Mason would have made much more money — hundreds of millions, in fact — had it simply taken a long position.

Lost in all of this maneuvering are the economic merits of Telus’s share collapse and the fact that nonvoting shares do appear to be getting a significant benefit that may be inappropriate.

According to sources close to Mason, the trade is currently profitable. But Mason is finding that its ingenious trade may lose it millions, thanks to the equally adroit maneuvering of Telus. Who said Canadians were too nice?


Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

Article source: http://dealbook.nytimes.com/2012/09/25/hedge-funds-complex-scheme-may-backfire-costing-it-millions/?partner=rss&emc=rss

Canada Is in No Hurry to Sell Its Chrysler Shares to Fiat

Last week, Fiat said that it would buy the United States government’s remaining holding in Chrysler. When completed, the transaction will give Fiat majority ownership of Chrysler, which emerged from bankruptcy about two years ago after receiving emergency financial assistance from the governments of the United States and Canada.

But after a meeting with Sergio Marchionne, the chief executive of both Chrysler and Fiat, Jim Flaherty, the finance minister, said that Canada would let the divestment process in the United States unfold before making any decision about its holdings.

“We’ve never believed the government of Canada should be in the automotive business,” Mr. Flaherty said at a news conference in Toronto. “But we have to look out for good value for Canadian taxpayers.”

After providing about 2.9 billion Canadian dollars in emergency loans, the government of Canada and the province of Ontario still hold a combined total of about 1.7 percent of Chrysler’s shares. Unlike the arrangement in the United States, neither Chrysler nor Fiat has any way to force the Canadian governments to divest.

The American process, which involves 6 percent of Chrysler’s shares, will establish a value for the company’s stock. If it is not to Mr. Flaherty’s liking, Canada can wait until Fiat has an initial public offering for Chrysler, or even later, to sell.

Mr. Flaherty, who met with Mr. Marchionne in Toronto to publicly signal Chrysler’s repayment of the 1.7 billion Canadian dollars in loans made through a federal export financing agency, did not indicate what price Canada might accept. Given that the government does not anticipate that Chrysler will pay back the remaining 1.2 billion Canadian dollars, it presumably hopes to recover at least some of that through the share sale.

“We will look at whatever is proposed and consider that,” Mr. Flaherty said.

It is unclear what the province of Ontario, which covered about one-third of the Canadian loans, plans to do with its shares.

Darcy McNeill, a spokesman for Dwight Duncan, the provincial minister of finance, said that it was “not appropriate” for the provincial government to comment at this time.

Article source: http://feeds.nytimes.com/click.phdo?i=5eee6378e32e7bb0b5364dd0803cd506

DealBook: Barrick Gold to Buy Equinox Minerals for $7.8 Billion

As prices for commodities keep climbing, the Barrick Gold Corporation said on Monday that it had agreed to acquire Equinox Minerals for 7.3 billion Canadian dollars, or $7.8 billion.

The all-cash offer values Equinox Minerals, which is listed in Toronto and Sydney, at 8.15 Canadian dollars a share, 30 percent above the price it shares were trading at on Feb. 25, the last trading day before the company announced an unsolicited bid for the Lundin Mining Corporation. The Equinox board has unanimously approved the Barrick Gold deal and withdrawn its offer for Lundin.

“The acquisition of Equinox would add a high-quality, long-life asset to our portfolio, and is consistent with our strategy of increasing gold and copper reserves through exploration and acquisitions,” Aaron Regent, chief executive of Barrick Gold, said in a statement.

The Barrick bid is also at a 16 percent premium to a $6.2 billion proposal by the Chinese miner Minmetals earlier this month, which Equinox said was a “lowball price.” Though Minmetals announced its plans for an unsolicited offer — rare for Chinese companies — no formal bid was made, and it is unknown whether it will engage in a bidding war. A spokesperson for Minmetals was not immediately available for comment.

Craig Williams, head of Equinox, said in a statement that the Barrick offer was “superior to the public proposal made by Minmetals in terms of certainty and value.”

The deal comes amid a boom in commodities. Gold recently reached a new high of $1,518 an ounce, with other metals appreciating, too.

The environment has encouraged dealmakers. The materials sector, which includes mining, saw $133 billion worth of mergers and acquisitions worldwide so far this year, more than double the amount of $57.5 billion for the same period in 2010, according to Thomson Reuters data.

With the acquisition of Equinox, Barrick will build out its presence in copper, adding to its interests in Chile. Equinox is one of the top 20 copper miners in the world. At full capacity, its Lumwana project near the Zambian copperbelt is expected to account for 20 percent of the country’s production of the metal.

Barrick Gold, which is set to report first-quarter results on Wednesday, saw earnings rise 57 percent in the fourth quarter, compared with the period a year earlier. In the last year, its share price has jumped 33 percent.

The company will finance the acquisition with a bridge loan and credit facility worth $5 billion from Royal Bank of Canada and Morgan Stanley. The financing will supplement the company’s existing $1.5 billion loan facility and its $4 billion in cash reserves.

The tender offer, which will start Tuesday and run for at least 35 days, and is conditional on Barrick obtaining two-thirds of all outstanding Equinox shares, including the 2 percent Barrick already owns.

Morgan Stanley and Royal Bank of Canada advised Barrick, while Ogilvy Renault, Sullivan Cromwell and Clayton Utz served as legal advisers. Equinox Minerals employed CIBC World Markets, Goldman Sachs and TD Securities as advisers and Hoskin Harcourt as legal counsel.

Article source: http://feeds.nytimes.com/click.phdo?i=e9a91ffd7ee77ae4c2a608f5c7227a15

DealBook: Minmetals Resources Bids $6.5 Billion for Equinox Minerals

9:04 p.m. | Updated

OTTAWA — A unit of a Chinese state-owned mining company said on Sunday that it had made an unsolicited $6.5 billion takeover bid for Equinox Minerals, a copper mining company based in Toronto.

The bid by Minmetals Resources, which is controlled by China Minmetals, is the latest effort by China to buy control of major resources required by its growing industries.

That strategy has been controversial at times, particularly in Canada. In 2004, China Minmetals tried to acquire Noranda, Canada’s largest mining company at the time, but withdrew the bid after it became a contentious political issue in Canada.

Another Chinese company, Sinochem, check both weighed a takeover offer for the Potash Corporation of Saskatchewan last year, but decided against bidding because of political opposition.

Martin McFarlane, the head of investor relations for Minmetals Resources, said on a conference call Sunday that the Canadian government is unlikely to block this transaction because Equinox’s mines are in Zambia and Saudi Arabia and the company has relatively few Canadian employees.

“We’re not expecting any particular issues,” Mr. McFarlane said.

The transaction must also be approved by the government of Australia, where Equinox also has a stock listing.

Under the terms of the offer, Minmetals Resources would pay 7 Canadian dollars a share, a 23 percent premium over Equinox’s Friday closing price.

The timing of Minmetals Resources’ bid was set in part to stymie Equinox’s own unsolicited bid for another Canadian mining firm, Lundin Mining. Lundin has urged its shareholders to reject Equinox’s cash-and-stock offer, initially valued at about 4.8 billion Canadian dollars.

During the call, Minmetals Resources’ chief executive, Andrew Michelmore, repeatedly emphasized that the company is financing the deal with cash from its parent and other Chinese companies. By contrast, he said, Equinox’s bid for Lundin will be supported by $3.2 billion in debt.

The Minmetals Resources bid, he added, would provide Equinox shareholders with certainty rather than what he called “a highly leveraged and relatively higher risk opportunity.”

In a statement, Equinox acknowledged the bid and said its board would meet to consider it.

Mr. Michelmore said the deal would allow Minmetals Resources to transform from being primarily a zinc producer to being a copper mining firm. Equinox looks attractive because its projects are either already operational or are about to become so, he said.

Equinox produced 146,690 tons of copper in 2010, generating about 1 billion Canadian dollars in revenue.

Minmetals is being advised by Deutsche Bank, Macquarie Capital and the law firms David Ward Phillips Vineberg, Freehills and Linklaters.

Michael J. de la Merced contributed reporting from New York.

Article source: http://dealbook.nytimes.com/2011/04/03/chinas-minmetals-bids-6-5-billion-for-equinox-minerals/?partner=rss&emc=rss