Telus Corp. 's proposal to eliminate its dual-class share structure is at risk of failure now that a U.S. hedge fund that holds nearly 19 per cent of its common shares is vowing to vote against the plan.
New York-based Mason Capital Management LLC made that disclosure in a filing on Tuesday, a move that signals it is seeking additional support from other institutional investors to topple the proposal when it is put to a shareholder vote next month.
"Mason previously advised Telus that it intends to vote against Telus' proposal, as currently formulated, to convert all of Telus' non-voting shares into common shares," its filing says.
As of March 31, Mason Capital controlled roughly 18.7 per cent of Telus's outstanding common voting shares and about 0.4 per cent of its outstanding non-voting shares.
Telus's share consolidation proposal, which seeks to convert each non-voting share into a common share on a one-for-one basis, requires the approval of two-thirds of the votes cast by each class of shareholder.
That means if voter turnout is low, or if Mason has other hedge funds as allies, Mason could be in a realistic position to block the plan. The results of the vote will be revealed at Telus's annual meeting of shareholders on May 9.
Telus chief financial officer Robert McFarlane characterized Mason's trading strategy as a "short-term, profit-driven" move that is independent of the merits of the share consolidation proposal.
"Both the voting shares and the non-voting shares have appreciated in price ever since the announcement, so the market is basically saying that it is a positive development for the voters and the non-voters," Mr. McFarlane said.
When asked whether Telus was working to ensure a high turnout for the vote, he replied: "Obviously, it would be in our shareholders' interests if they voted on the proposal. And it would be shame if they didn't because you have the threat of a party that really isn't a net owner of Telus economically and is intending to vote against something that is in the best interests of the company."
Vancouver-based Telus first announced its one-for-one share conversion proposal in February, stressing it was eager to discard its redundant dual-share structure given that it no longer had a single, dominant foreign shareholder.
Last month, however, it announced that foreign investors were attempting to push the company past non-Canadian ownership limit of 33 1/3 per cent and warned that its transfer agent may not be able to approve all pending or new applications for share purchases.
That issue arose because Telus left an opening for hedge funds to make a profit. Its non-voting shares have generally traded at a discount of about 5 per cent, or an average of about $2.50 a share, to Telus voting shares. So the 1:1 ratio was a bit of a gift to owners of non-voting stock.
The standard play for a hedge fund in such a situation was to buy non-voting stock, short sell the voting shares, and sit back. (A short sale occurs when the seller borrows stock from a brokerage, and sells it, expecting the price to fall. If it does, the seller will buy stock at the lower price to replace the stock that was borrowed.) When the conversion was completed, those investors would be given voting stock in return for their non-voting stock. After closing out the short position, an investor could be up $2.50.
But as some funds put on that trade, basically erasing the historical gap between the two classes of stock, other funds like Mason then appear to have gone the other way.
The opportunity was this: If Mason and others could buy enough voting shares to create the threat of stopping Telus's plan when it came to a shareholder vote, while shorting the non-voting stock, the gap between the stock classes would more than likely widen again (and it has been doing so). Mason would make money as the gap widened.
Mason said in its filing that it had shorted at least 21.6 million non-voting shares, but had received requests from the people who lent the stock to return it.
Mr. McFarlane said he's unaware of any other hedge funds that object to the share-consolidation proposal, adding Telus's long-term shareholders are "overwhelmingly supportive" in terms of their indications to the company.
Moreover, Telus's board of directors remains steadfast in its position that the share-consolidation proposal is not negotiable.