TORONTO - An independent evaluation of Magna International Inc.'s plan to buy out founder Frank Stronach's controlling stake in the company raised the spectre of "significant negative reaction from shareholders" even before the proposal was made public.
The CIBC World Markets report — which was prepared for a special committee at Magna (TSX:MG.A) and dated May 5, one day before the company announced its intentions — suggested the proposal could raise the ire of shareholders because of the 1,800 per cent premium it will pay Stronach to give up his family's voting control.
"There is potential for significant negative reaction from shareholders," CIBC said in the report, entitled "Project Raven."
"Although the transaction agreement places completion of the proposal in the hands of the holders of the class A shares, given the size of the payment to Stronach Trust the terms of the proposal will be controversial."
Under the proposal, Stronach and his family trust would receive $300 million in cash and nine million common shares worth roughly $625 million, given their value on the TSX Thursday, to give up their multiple voting shares.
This would result in "a much higher level of dilution" to holders of Magna's non-controlling class A shares at 11.4 per cent than any previous dual-class share reorganization, the report said. The report said the 15 dual-class share reorganizations it reviewed resulted in dilutions of no more than 3.04 per cent.
Magna released the CIBC report Thursday in the hope of deflecting an attempt by an Ontario regulator to quash the proposal. The Ontario Securities Commission said earlier this week that Magna's shareholders are being asked to approve the plan without a recommendation by its board of directors and without sufficient information and this is "contrary to the public interest and harmful to the integrity of the Ontario capital markets."
Magna emphasized that it feels it had already released enough information for shareholders to make an informed decision on the plan, but was releasing the evaluation to respond to the concerns expressed by the OSC.
"Magna strongly believes that its existing disclosure is entirely appropriate and contains all information necessary to enable minority shareholders to make a reasoned judgment about the transaction," the company said in a statement Thursday.
"Nevertheless, Magna is providing this additional disclosure in response to the concerns expressed by OSC staff."
However, one shareholders' rights group said releasing the CIBC report wasn't enough, because it doesn't provide an opinion on the fairness of the deal and Magna's board still hasn't issued a recommendation one way or the other.
"We (want) some sort of rationale, some sort of formula upon which this determination has been made," said Ilana Singer, associate director of the Canadian Foundation for the Advancement of Investor Rights, or FAIR, which intends to apply for intervener status at the OSC's preliminary hearing on the matter Friday.
"There's really been a general lack of transparency in the whole process," she added.
FAIR, along with some Magna shareholders and the OSC, have argued that the deal should be blocked because the huge premium that will be paid to Stronach will set a "dangerous" precedent for Canadian capital markets.
"I'd like to see some more documentation as to why this conversion is taking place at a ratio that is totally unprecedented compared to anything else that we've seen before," Leo de Bever, CEO of Alberta Investment Management Corp., said Thursday in an interview on BNN, a business news channel based in Toronto.
The money manager, a Magna shareholder, has said it will vote against the deal.
The evaluation by CIBC World Markets also pointed out a number of potential benefits to the proposal, including:
— A broader shareholder base, as there are several institutions that are invested in other auto suppliers but don't currently have meaningful investments in Magna, possibly because they avoid investing in firms with a dual-class share structure.
— Increased liquidity. The average trading volume of Magna's shares has increased significantly since the deal was announced.
— A higher share price. Magna's shares trade at a discount compared to its peers, such as Linamar Corp. (TSX:LNR), although they gained more than 14 per cent on the Toronto Stock Exchange between early May, when Magna announced its plan, and Wednesday, when the market reacted to the OSC's allegations by sending them lower.
Many institutional investors shun companies with dual-class share structures such as Magna's, which give one group of shareholders — often the company's founding family — voting control without a majority equity interest.
This is the case at Magna, where each of the Stronach family's 750,000 class B shares has 300 votes, giving the Stronachs a 66 per cent voting interest.
Many of Magna's shareholders oppose the dual-class structure in principle, but have said they'll vote against the proposal to do away with Magna's because of the precedent it would set.
The Caisse de depot et placement du Quebec, one of Canada's largest pension fund managers, said Thursday it recently bought shares in Magna, but wouldn't disclose how it intends to vote.
Magna has said shareholders representing 24 per cent of its class A shares have voted so far, with more than 99 per cent approving the transaction.
If the proposal is approved, it will also create a new joint venture with the Stronach group, to be 73 per cent owned by Magna and run by Frank Stronach, that would develop electric vehicles and their components.
The OSC has called a hearing for next Wednesday during which enforcement staff will ask a commission panel to strike down the proposed transaction. Magna has called a shareholder vote on the plan for June 28.
Shares in Magna added six cents to $69.36 in Thursday trading on the TSX.