Frank Stronach has his windfall. Magna International Inc. Magna International Inc. MG-T shareholders are still waiting for theirs.
Payback is slow for Magna shareholders who laid out $863-million (U.S.) in cash and stock to buy control of the company from founder Frank Stronach.
It’s now more than a year since Magna unveiled the controversial deal to pay Mr. Stronach a huge premium – estimated at about 1,800 per cent – for his super-voting shares in the auto parts maker.
In unveiling the plan last year, Magna’s pitch to investors was that there was a discount on the stock, and that changing the ownership structure by buying out Mr. Stronach and eliminating his control would bring Magna’s valuation more in line with other auto parts makers.
It would be the end of the “Frank factor” or the “Stronach discount” – not that the company would put it in those terms. No longer would the company be subjected to the whims of one unpredictable, if visionary, man. There would be no more of Mr. Stronach’s dreams (and shareholder nightmares) of owning racetracks, airline businesses and theme parks.
While the buyout transaction drew scrutiny from regulators who were underwhelmed with Magna’s disclosure, and from some shareholders who thought the payment exorbitant, enough shareholders supported the plan for it to close on Aug. 31.
It was realpolitik winning over idealism. Hedge fund manager David Einhorn recently called a similar transaction at another Stronach company, MI Developments, a “hostage negotiation” and ranked it as “as our least favourite investment (with a positive return) of all time.” But in the end, if the positive return is there, it’s a win.
For Magna shareholders, is it? The stock is up about 50 per cent since the plan was announced in early May of last year. But most big auto parts stocks have been on the rise as the financial crisis recedes in the rearview mirror.
A more telling measure is Magna’s valuation relative to its peers. Has it closed the gap? Only a bit.
A chart of the multiples of all the big auto makers looks like an aerial view of the Tour de France. There’s a group of also-rans back in the peloton, and a few standouts who are far ahead. Magna has gone from bringing up the rear to overtaking the also-rans, but it’s nowhere near the yellow jersey.
Still, by that measure, Magna argues the plan is working.
“Magna clearly has narrowed the valuation gap relative to our peers, and now exceeds the multiple of a number of our closest peers in North America,” said Vince Galifi, Magna’s chief financial officer. “We have stated on many occasions that we believe it will take some time before the market fully absorbs the positive impacts of the transaction.”
Magna told investors in its filings that the Stronach transaction would add to shareholder value if it resulted in an increase in one key measure. The deal would be “accretive” if Magna enjoyed a rise of least half a point for Magna’s ratio of total enterprise value (equity plus debt) to 2011 earnings before interest, taxes, depreciation and amortization. In other words, if investors started to give Magna more attention, the stock would rise faster than earnings and the total value of the company would increase at an accelerated pace.
On March 31, 2010, at the end of the last quarter before the transaction was announced in May, 2010, Magna traded at an EV/2011 Ebitda multiple of 3.6 times, last among its peers and well below the peer average of 5.4 times.
As of June 30, 2011, Magna’s multiple had risen to 5.5 times, but the peer average has risen to 6.7 times. From dead last prior the announcement, Magna had pushed ahead and fetched a better multiple than peers such as Dana Holding Corp., American Axle & Manufacturing Inc. and Lear Corp. However, it’s still a long way from the top companies in the sector. Johnson Controls Inc. sported an 11 times multiple as of June 30, BorgWarner Inc. boasted 9.8 times and Meritor Inc. stood at 7.7 times.
Mr. Galifi expects that to change, arguing that “with the passage of time, there is the potential to gain further ground against the leading companies in our peer group.”
In the meantime, there’s one Magna shareholder who got a clear win, and he’s long gone. Mr. Stronach has sold almost all of his stake in the past few months.
