Hedge funds got their way this week following a seven-year battle with the real estate spinoff of Magna International Inc. and its founder, the billionaire Frank Stronach.
MI Developments Inc., which rents office and factory properties to Magna, an auto parts maker, said Tuesday it plans to convert itself into a real estate investment trust and quintuple its dividend. The company also plans to reduce its dependence on its former parent and finance acquisitions with debt.
"This announcement represents a victory and vindication for all of the activist shareholders that have worked towards this over the last seven years," said Alex Avery, an analyst at CIBC World Markets Inc. in Toronto.
"It's an interesting situation because the company has so little debt and is so well capitalized that it could easily double in size without raising additional equity."
The shares surged to their highest price in four years on Wednesday following the announcement.
Minority investors had been pushing for the REIT structure since 2004 as a way to extract bigger rewards from MI Developments. Prominent among the activists was Greenlight Capital LLC, the hedge fund controlled by U.S. investor David Einhorn, which sold its stake this year.
This week's proposal concluded a review led by William Lenehan, who was with the hedge fund Farallon Capital Management LLC until he was named MI's interim chief executive officer in July.
"It really is a full transformation," said Lee Matheson, who holds shares in MI Developments among the $20-million he helps to manage at Broadview Capital Management Inc., a Toronto-based hedge fund. "They're really going to bring it back to being a lean, focused enterprise, which I think is good."
Including reinvested dividends, shares of MI Developments rose 11.4 per cent this year through Tuesday, before the company outlined its plans. That compares with a 13.3-per-cent increase by the S&P/TSX Capped REIT index of Canadian real estate investment trusts, and an 8-per-cent decline for the S&P/TSX composite index, a benchmark for the country's overall stock market.
MI Developments plans to acquire assets and sell others to lower the proportion of its revenue coming from Magna, Mr. Lenehan said on a conference call Wednesday. The company will expand outside the car sector while continuing to manage properties for large industrial manufacturers, he said.
"Investors, especially Canadian investors, have consistently mentioned the desire for a higher dividend," Mr. Lenehan said. "Diversification of our portfolio will be global. We will focus on favourable tax jurisdictions and we will focus outside the automotive sector for maximum diversification benefits."
Analysts speculated that MI Developments would be a tempting takeover target for Dundee International Real Estate Investment Trust because they both have substantial operations in Germany. Mr. Lenehan, speaking in an interview Wednesday, declined to comment.
Austrian-born Mr. Stronach, 79, moved to Canada in 1954 and turned Magna into one of the world's largest suppliers of car parts. The Aurora, Ont.-based company spun off MI Developments in August, 2003.
Hedge funds filed a lawsuit accusing Mr. Stronach of suppressing the interests of minority shareholders. The battle got so fierce that Mr. Einhorn took the podium at the 2005 MI annual meeting to assail Mr. Stronach's control of the company.
Mr. Stronach exited MI Developments earlier this year.
MI's planned dividend boost will bring its yield closer to that of its peers, analysts and investors said. The quarterly dividend will rise to 50 cents (U.S.) a share, or $2 a year, starting with the next payout in December.