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Foreigners play with Telus shares Canada's Telus Corp. says foreign investors appear to be fiddling with its shares, a move that could push the company past non-Canadian ownership limits after it announced that it would convert its non-voting stock to common.
The Vancouver-based telecommunications company, one of Canada's major players, said today some 24 per cent of its common stock was believed to be in foreign hands as of yesterday. But when applications for share purchases by non-Canadians are taken into account, and if approved, foreign ownership would rise by more than 35 million shares, taking it above 33 1/3-per-cent limit.
"Accordingly, the company is reminding non-Canadian investors of its reservation procedures," it said in a statement. "Telus is examining the situation and wishes to inform the market that its transfer agent may not be able to approve all the pending or new applications."
The problem, Telus said, appears to be related to a plan, announced a month ago, to convert non-voting shares to common stock. In the wake of the announcement, the company believes arbitrage investors are using "short-term, event-driven trading tactics" to profit, even though they have no concern about the long-term stock price.
Telus thinks the foreign investors - it didn't say who but presumably they're hedge funds - are buying the common stock and shorting the non-voting shares. That could suggest those investors are betting the conversion proposal won't go through at a May 9, or that the company may change the exchange ratio from one-for-one to something less.
"The voting shares traded at a 4.5-per-cent to 5-per-cent premium on average over the non-voters over the last three years," said CanaccordGenuity analyst Dvai Ghose. "This spread narrowed to essentially zero after Telus' Feb. 21 share collapse proposal announcement, but has since widened to approximately 1.3 per cent as some arbitrage traders now assume that Telus may not receive the two-thirds approval required by voting shareholders."
Telus said the "sole purpose" of the foreign investors appears to be aimed at influencing the conversion and boosting that spread for a quick profit.
"Since 2004, the level of non-Canadian ownership of common shares has been generally below 20 per cent and the current level is an exceptional development," the company said.
It looks like foreign investors are buying the common and presumably shorting the non-voting "to either potentially scuttle the company's proposed dual-share collapse or, at the very least, bet on a widening of the spread between the two share classes," said analyst Adam Shine of National Bank Financial.
Given that the plan needs two-thirds support, it wouldn't succeed if all the non-Canadian shareholders opposed it, Mr. Shine said.
According to the analyst, Telus could respond by:
- Refusing to register a transfer of voting shares to a foreigner.
- Forcing a foreigner to sell voting stock.
- Converting voting to non-voting.
- Suspending voting rights for those shares in inverse order of their registration.
"It now remains to seen which, if any, of these rights Telus may need or choose to exercise to maintain its compliance with foreign ownership restrictions," Mr. Shine added. "At the very least, not all of the current demand by non-Canadians for common shares will be fulfilled."
Mr. Ghose believes the conversion will be approved at the May 9 vote, and that Telus won't change the plan.
"In our view it is highly unlikely that Telus will come back with an amended offer - the outcome appears binary," he said. "Either the vote will be accepted and Telus voting and non-voting shares will trade at par from May 9 or it will be rejected and we will go back to a 4.5-per-cent to 5-per-cent premium for the voters."
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