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The private pleasures of David Werklund Add to ...

The gods have been kind to Rich Kinder. In the 1990s, he was a star executive at an energy firm you may have heard of: Enron. But his ambitions were frustrated and he left, taking with him some unwanted assets from his former employer. Today, while ex-colleagues languish in prison, Mr. Kinder's a multibillionaire.

If Alberta has a Kinder equivalent, it might be David Werklund. He, too, once worked for a big energy concern (in this case, Shell Canada), then went out on his own and made it big. CCS Income Trust, his Calgary oil services company, is one of the best get-rich stocks in the country in the past decade, turning a $1-million investment into nearly $32-million. The numbers say that if Mr. Werklund's not an entrepreneurial legend, he should be.

The two men have something else in common now. Mr. Kinder became the poster child for the cynicism and conflicts of interest that usually prevail in management buyouts. The $15-billion (U.S.) privatization of Kinder Morgan Inc. closed in May, but not before Pipeline Boy's name was tarnished for trying to lowball investors.

A similar fate may await Mr. Werklund as he and his private equity partners, including Goldman Sachs, try to squeeze out CCS shareholders.

A buyout of CCS was always going to be controversial. Canadian fund managers aren't famous for their backbone, but few will readily give up a stock that has delivered 41-per-cent annual returns. The timing of the deal - eight months after the feds imposed a new tax on income trusts and in the middle of a lull in the oil services sector - is opportunistic, to say the least. But the biggest sore point is that while Mr. Werklund wants his share owners to sell, he's keeping most of his equity, and plans to own 28 per cent of the privatized CCS. Do as I say, not as I do?

So this was not an auction that was forced upon the company because the founder needed his money; it wasn't an auction at all. Mr. Werklund decided he would work with the Goldman group and no one else. And other not-so-fun details about the deal have emerged. FirstEnergy, the Calgary investment bank, was hired to do a fairness opinion and figured that, even in a pessimistic scenario, the stock would be worth at least $45.42 (Canadian), barely less than the $46 offer.

The bank's more bullish projections placed the stock's value at nearly $53. Even that may be an understatement. Tom Dea of West Face Capital, a Toronto hedge fund, argues there were serious mistakes in FirstEnergy's calculations; correcting them would take the valuation above $61, he says. An open auction might have delivered that value.

"As a former private equity guy" - Mr. Dea used to work for Onex - "I'd say you would have had many private equity firms that would love to have invested in this company." CCS enjoys a rare trifecta of cash flow, growth and high returns: Its return on equity last year was 28.2 per cent, according to Standard & Poor's/Capital IQ.

Wouldn't you love to own a business where every dollar reinvested earned you 28 cents in profit the next year?

So would Mr. Werklund, but his buyout ambitions may be hurt by his own words. Two years ago he gave an interview in which he declared his admiration for Warren Buffett and gushed about the incredible prospects of CCS: "We have developed a business model that we can take essentially any place in the world. ... We see a lot of potential in the U.S., Mexican and Middle East markets." FirstEnergy projects that earnings before interest, taxes, depreciation and amortization (EBITDA) will more than double between 2008 and 2016. CCS has really only begun its international expansion.

Given the record, it would have no trouble raising the money in a public market to carry out its plans. So why go private? Management has struggled to come up with a persuasive explanation, though lately, they've been helped a bit by the financial markets. Every major stock exchange has been roiled by the credit squeeze. The S&P/TSX composite is 6-per-cent lower today than on June 29, the day the buyout was announced. The buyout industry is, for the moment, paralyzed by turmoil in the bond market. "Trying to put this transaction together again, in this market, would be difficult," says Marshall McRae, CCS's chief financial officer, who adds that the $46 offer is a sure thing, with financing already in place.

The subtle implication: Reject this deal and the share price will fall, without any guarantee of another bid. That will test fund managers' nerves, but if they're long-term shareholders, so what? True investing, a well-known businessman once said, means focusing on business value, not short-term stock moves: "A wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses."

Who said it? Mr. Buffett - David Werklund's favourite entrepreneur.

ddecloet@globeandmail.com

 

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