BAY STREET-Magna's Stronach in a class of his own

Sun Jun 27, 2010 10:30am EDT

* Other companies unlikely to pay a Magna-like premium

* In 2005 around 20-25 pct of TSX stocks were dual-class

* Most Canada dual-class stocks don't trade at discount

By John McCrank

TORONTO, June 27 (Reuters) - Magna International Inc's MGa.TO plan to pay Frank Stronach an enormous premium to give up control of the company he founded is a special case that's unlikely to set a trend among dual-class listed companies.

To be sure, a who's who of Canadian companies are set up much like Magna, including Shaw Communications Inc (SJRb.TO), Rogers Communications Inc (RCIb.TO), Bombardier Inc (BBDb.TO), Power Corp (POW.TO) and Astral Media ACMa.TO.

All of them have a dual-class structure that allows a person or group to control the company through special shares that carry more votes than than regular class shares.

At Magna, Stronach owns just 0.6 percent the equity, but his shares carry 300 votes each, versus one vote each for the subordinate shares, putting the reins firmly in his hands.

Using that structure, Stronach built his small tool-and-die shop into the world's No. 3 auto-parts company, with a market capitalization of about $8 billion.

Over the years, Stronach has tried to take the company in directions that many shareholders openly opposed.

One example is Magna Entertainment, a racetrack operator. Stronach MECAQ.PK, a thoroughbred enthusiast, started the company under Magna's banner and then it took public, though with a Magna subsidiary as the key stakeholder.

There was also a failed bid to buy Chrysler in 2007 -- Stronach later said Magna "dodged a bullet" with that one -- and a failed bid for General Motors Co's Opel unit last year.

"The concern is that the multi-voters permit that sort of thing and therefore the stocks can attract a discount because of the risks that are entailed," said David Tyerman, an analyst at Genuity Capital Markets in Toronto.

By contrast, most other Canadian dual-listed companies are in good standing among investors and do not trade at a discount. As a consequence, most of them have little incentive to change the status quo.

Bombardier is an example of a dual-class structured company that has not attracted negative attention due to the control exercised by the Beaudoin family, Tyerman said.

"When I talk to investors, it's definitely not an issue."

Shaw and Rogers are also family-controlled companies.

"The holdings of these families have enabled the companies to retain a long-term view, which in a capital-intensive industry grounds the companies in making good decisions long term, rather than focusing on short-term outcomes," said Maher Yaghi, an analyst at Desjardins Securities in Montreal.

"FRANK FACTOR"

Some analysts refer to the discount at which Magna shares trade relative to its peers, as the "Frank factor".

To remove the discount and unlock value for shareholders, Magna's management put forward a plan to pay Stronach $300 million plus 9 million class A shares in exchange for the elimination of his control block.

Based on the company's share price the day before the deal was announced in May, that would give Stronach an $864 million payday.

Under the arrangement he would remain chairman of Magna while also controlling a joint venture between Magna and the Stronach Trust making parts for electric and hybrid vehicles.

Since Magna took the lid off the plan last month, shareholders and corporate governance activists have vented their spleen at the proposed payout and dilution of shares. But on the day of the announcement, Magna's shares jumped 14 percent, a clear sign that investors have embraced the plan, despite the high cost.

"What this man is doing is oppressing people," said Montreal billionaire investor Stephen Jarislowsky. "He's saying if you want me to partially stop oppressing you ... then here is what you have to do."

Jarislowsky said he never invested in Magna because he thought Stronach's "consulting fees" -- adding up some years to tens of millions of dollars -- were unfair.

But the Ontario Securities Commission, in a ruling late Thursday, said it was "not convinced" the Stronach deal was abusive to shareholders, though it said Magna must provide shareholders with more information before taking it to a vote.

Other dual-listed companies could go in the same direction, "but there isn't any kind of massive migration from one to another," Tyerman said.

For those that make the switch, the precedent set by Magna of taking a huge payment to relinquish control will surely come up, he said.

"It would be surprising if it didn't go through their minds," he said. "Whether they go to the level of Magna depends on how much they want to get into a fight."

($1=$1.04 Canadian) (Reporting by John McCrank; Editing by Frank McGurty)

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