Pension Plans Nix Magna’s Dual Share Payout

TORONTO (Reuters) – Two big pension plans came out swinging on Thursday against a plan that would pay the colorful founder of auto parts maker Magna International (MGa.TO) nearly $900 million to cede control, throwing up a possible road block to the deal.

David Denison, the chief executive of the Canada Pension Plan Investment Board, said Frank Stronach would get an “unreasonable” payoff for giving up control of Magna.

“Our view is it’s too large a price,” Denison told Reuters in an interview. The board manages pension funds for some 18 million Canadians and is one of the world’s largest private equity investors. It holds almost 1 percent of Magna class A shares and is its 23rd largest shareholder.

The Ontario Teachers’ Pension Plan, another big private equity investor and a minor Magna shareholder, will also vote against the proposal, under which Magna is offering the Stronach Trust $300 million in cash and about 7.5 percent of Magna to give up the class B shares that give the company founder control.

That would bring Stronach an $863 million payday.

“Teachers’ believes Magna International’s proposal … is fundamentally unfair to the company’s subordinate voting shareholders,” the pension manager said in a statement.

Denison said he wants to see the end of Magna’s dual share class structure. But he added: “The price that we and other shareholders are being asked to pay in order to get that outcome is just absolutely unreasonable.”

Shareholders will vote on June 28 on who controls Magna, the world’s No. 3 auto parts company, and a firm with a history of thinking big. Magna bid for Chrysler (FIA.MI) in 2007, and last year lost out on a bid for General Motors’ [GM.UL] Opel unit, when GM decided to keep the European car maker.

SORE POINT

The dual-share structure has long been a sore point for investors, and Magna stock surged as much as 23 percent in May when the proposal was announced.

The shares are still up around 15 percent and numerous analysts have upgraded their price targets for the company. A “no” vote could trigger a selloff.

“I was thrilled to hear about (the proposal) when they first announced it and I raised my fair value on the stock by quite a bit accordingly,” said David Whiston, an analyst at Morningstar who does not own Magna stock. “I would have to reverse it if they vote against it.”

He said he thinks the vote will pass, although it may leave a bad taste.

Another Magna shareholder, one of its largest institutional owners, said he was still deciding how to vote.

“There is no question it creates value for the stock, because it removes the overhang of U.S. investors who are unwilling to look at a Canadian company with a multiple voting structure, and so it puts a debt-free, well run, global auto supplier on the radar screen of a much, much broader audience of investors,” said the shareholder, who declined to be named.

“Mathematically, it adds value, but it is offensive that (Stronach) is extracting so much value.”

Shares of Aurora, Ontario-based Magna ended 1.5 percent higher on Thursday at C$72.90.

NO RECOMMENDATION

Denison said he is also worried that the special committee of Magna’s board that put forward the proposal did not make any recommendation as to its fairness “to Magna, its shareholders or other stakeholders.”

Canadian Imperial Bank of Commerce (CM.TO), which analyzed the deal for the committee, offered no fairness opinion.

“The board … has a clear fiduciary responsibility to the company to propose and recommend a solution … but do so in a reasonable and equitable way,” Denison said.

Magna spokeswoman Tracy Fuerst said the advisors could not provide a fairness opinion because there are no precedents for the deal and not enough information to base a decision on.

Denison dismissed that.

“If this is allowed to go through, it becomes a prior precedent transaction and we think that would be a terrible precedent to have in the marketplace,” he said.

Stronach, who built up Magna from a tool and die shop in a Toronto garage after emigrating from Austria with a couple of hundred dollars, has faced down angry shareholders before.

He used his super-voting block to quash a 2008 proposal by Greenlight Capital Inc investors that MI Developments, Magna’s real estate arm, exit the money losing Magna Entertainment Corp racetrack business.

Investors had opposed a reorganization plan, which would have given Stronach a payoff worth hundreds of millions of dollars. The reorganization plan was later withdrawn.

($1=$1.04 Canadian) (Additional reporting by Pav Jordan; editing by Janet Guttsman and Rob Wilson)