Toronto-based Brookfield Corp. (BN-T) is a giant international conglomerate with $850-billion in assets. It can trace its roots back over a century. Its businesses include asset management, real estate, renewable energy, infrastructure, insurance and more.
It’s a great business success story. Too bad it seems to go out of its way to confuse investors.
Several years ago, the company began to spin off some of its operations into separate units, partially owned by the parent company and partially by outside investors. That led to the creation of Brookfield Infrastructure Partners LP (BIP.UN-T), Brookfield Renewable Partners LP (BEP.UN-T), Brookfield Business Partners LP (BBU.UN-T), Brookfield Reinsurance Ltd. (BNRE-T) and Brookfield Property Partners LP (BPY.UN-T). Some of these spinoffs became popular with investors, others not so much. The moves raised more equity capital for the company to reinvest and eventually won over the market.
Then came a share distribution that left investors’ heads spinning. Last December, the parent company, which had been known as Brookfield Asset Management (BAM-T), was renamed Brookfield Corporation, with a new trading symbol, BN, in Toronto and New York. Shareholders retained their stock in BN and also received one share of the new Brookfield Asset Management (BAM) for every four shares of BN owned. BAM was redefined as “a leading, globally diversified, pure-play asset management business with approximately 50 unique product offerings and strategies that span a wide range of risk-adjusted returns, including opportunistic, value-add, core, super-core and credit.”
In short, the new BAM was a more tightly focused company. If you owned 100 shares of the old BAM, you now owned 100 shares of BN plus 25 shares of the new BAM after the distribution.
Based on the e-mails I received, it took a while for investors to grasp what had happened. Now Brookfield has introduced a new twist that has shareholders wondering what to do. Here’s an e-mail I received last week.
“We are an Ottawa couple 82 and 79 years old. We own shares of Brookfield Corp. and Brookfield Asset Management in our TFSA accounts. We have just received notice of a tender offer from Brookfield to which we must reply soon. We are currently away in France. We find this tender offer very confusing. Can you shed some light on it?,” ask Marsha and Warren B.
I can see why they’re puzzled. This deal is even more baffling than the BAM spinoff.
Brookfield is offering BN shareholders the right to exchange their holdings for shares of Brookfield Reinsurance (BNRE-T) on a one-for-one basis. The offer is open until 5 p.m. on Nov. 13 and allows up to 40 million shares to be exchanged.
The company says the reason for the offer is to increase the equity base and market capitalization of Brookfield Reinsurance without any dilution to Brookfield Corp. or Brookfield Reinsurance shareholders. BNRE is very thinly traded; the average daily trading volume in Toronto is just 17,379 and about half that in New York. That may explain why few people outside the industry have heard of it.
Brookfield Reinsurance operates globally and has $47-billion in assets under management. The company provides a range of services, including reinsurance (insuring insurers), annuities and investment management.
Investors who tender their shares of BN are exchanging their holdings in a global conglomerate for shares in a company with a much narrower focus, but one that maintains exposure to all the economics of BN. This is due to the fact shares in BNRE can be exchanged for those of BN on a one-for-one basis at any time. However, you cannot exchange BN for BNRE after the offer period.
BNRE shares pay a return of capital distribution rather than a dividend. Return of capital reduces the shareholder’s tax base, resulting in a tax deferral until the shares are sold. This is why BNRE shares usually trade at a premium of a few cents to BN shares. Of course, this tax saving only applies if the shares are in a non-registered account.
One more point to consider. The current offer is a taxable event for Canadians. If you have a capital gain on BN stock and the shares are in a non-registered account, it will be crystallized if you switch to BNRE and you’ll be taxed on your 2023 return.
Both stocks pay quarterly dividends of US$0.07 a share.
Investors must make their own decisions on whether to take the offer. For the record, I own shares of BN. I’m not exchanging them.
Gordon Pape is the editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
Editor’s note: Earlier versions cited an incorrect stock price for Brookfield Corp. and incorrect numbers were given on the year-to-date performance of two related stocks. The correct figures are -3.87 per cent for BNRE and -5.05% for BN. This version also adds additional commentary about the exchange offering, including tax implications.
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Gordon Pape