Telus Corp. has made its battle with Mason Capital too much about the messenger, when the real discussion should be the message.
Yes, Mason Capital is a New York-based hedge fund. Yes, it very well may be seeking short-term gains by attempting to upend Telus’ plan to convert its non-voting shares into voting shares on a one-for-one basis. Mason has amassed almost a fifth of the voting shares and plans to vote No at the May 9 annual meeting, putting the conversion plan in danger because it needs two-thirds in favour to pass.
Telus’ simplistic typecasting, portraying Mason as the black-hatted foe of corporate governance, is ignoring the real issue on which Mason has shone a spotlight. That is: Is it fair to Telus voting shareholders to give owners of non-voting shares new voting shares on a one-for-one basis that ignores the historical trading relationship between the voting shares and the non-voters?
On the surface, one-for-one has a nice feel to it. Take those poor disenfranchised owners of non-voting shares, a historical accident, and give them voting shares. Don’t make them take a little less than one voting share for every non-voting share to reflect the way the markets have always valued the stock.
Over the years, people have consistently paid less for non-voting shares, on the order of almost 5 per cent. Telus argues that is because investors misunderstand the difference between the share classes. Really? Markets are good at sniffing out such discounts and closing them if they are unwarranted.
This gap never closed, signalling that people saw more value in the voting shares. People paid up for the vote. Now Telus is proposing to its voting shareholders that they share their votes and, the value of them, for little in return. And the company is vilifying Mason as some sort of pirate for arguing the other side.
“They are trying to disrupt Telus’ long-terms for their own short-term gain. That would be unfortunate,” Telus says on its website.
Hedge funds are easy public relations targets. But this doesn’t smell right.
By planning the exchange on a one-for-one basis, Telus’ management and board is proposing to give away something that doesn’t belong to the company.
Control of Telus belongs to the voting shareholders. It’s not unreasonable for someone to ask for compensation for something they are giving up, even if it’s for the good of the company.
When shareholders are asked to relinquish or share control in any transaction, the person acquiring control usually must pay a price. In a takeover, there’s almost always a premium. A board of directors that didn’t extract one from an acquirer would be pilloried.
“The voting shares control the company,” said Mason principal Michael Martino, in his first interview on the subject. “Nothing has to happen, or we don’t have to allow anything detrimental to the voting shares unless we agree to it. We have the power to just say no. We have the power to only accept the deal we like. There’s a tremendous value that’s being diluted away in this transaction.”
So what is that value?
Mason says it wants more than the historical premium that the voting shares have garnered. In other words, change the share ratio so that it reflects the long-term spread, and more.
“There’s no reason why a voting shareholder would ever take anything less than the status quo,” Mr. Martino said. “That would be a starting point.” That could be a stretch, but negotiating is all about asking for a lot and hoping for something in the middle. However, Telus isn’t in the mood to negotiate.
The company has been rock-solid in its commitment to a one-for-one basis.
Telus suggests that the transaction will have lots of benefits, mainly making a single class of shares that will be more liquid and enhancing corporate governance by enfranchising shareholders.
The company points to a rise in both classes of shares since the announcement as evidence of the positives.
The plan if Telus loses the vote is to wait and hope Mason goes away, then try again. Mr. Martino says he may well stick around.
In the meantime, Telus should recognize that the argument about the ratio should be about the facts, not who’s putting them forward.
Perhaps it’s too much to hope for civility in a proxy battle, the business world’s equivalent of an election race. Facts and rational debate take a back seat to typecasting there too.
This isn't good versus evil. It's a disagreement over how to value a piece of a company.
The debate should be more about what’s on the table, rather than who put it there.