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Vancouver portfolio manager Wade Burton has made a $70-million bet that the world is wrong about Gerry Schwartz.

You've heard the rap on Onex Corp.'s buyout master. He has lost his touch, his doubters say, and they've amassed some evidence. Mr. Schwartz let other merchant banks, namely Kohlberg Kravis Roberts and Co. and Ontario Teachers Pension Plan Board, walk away with a windfall on big deals like Shoppers Drug Mart Corp. and Yellow Pages Group Co.

He poured $173-million into Magnatrax, a U.S. maker of steel building products, and lost it all when the company was forced into a Chapter 11 bankruptcy restructuring. It was the first such defeat in Onex's history - though it's nothing compared to what Mr. Schwartz might have lost had he got his way and bought Air Canada in 1999.

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"I would say there's been very few periods in Schwartz's lifetime of working on Onex where people had as little faith in him as they have today," says Mr. Burton, who holds about 4.5-million Onex shares in funds he manages for Mackenzie Financial Corp. But if you look at his record, "he's really done nothing to justify this hatred toward him as an investor."

Yet the antipathy remains. Onex shares remain about 30 per cent per cent below where they were four years ago and trade at about 30 per cent less than the value of the company's assets.

Perhaps that's why it has taken so long for people to notice that Gerry Schwartz, at 62, has been carefully orchestrating his comeback. More than ever, says Mr. Schwartz, Onex is now prepared to be a major player in enormous deals. "I would say that we would look at anything up to $1-billion."

Indeed, while KKR was stealing the headlines, Mr. Schwartz has been cleaning up Onex's portfolio, writing off bad investments and selling ones that had peaked. Last week, Onex closed the $2-billion sale of theatre chain Loews Cineplex Entertainment Corp., collecting about $775-million in proceeds.

As a result, Mr. Schwartz is now sitting on a $1.7-billion mountain of cash, plus another $1.4-billion or so that institutional investors have given to him to invest on their behalf. Never in Onex's 17 years as a public company has it had so much money to play with. For investors, the $3-billion question is, therefore, what exactly will Mr. Schwartz do with it?

Most of the talk lately is about Onex's backing of Ian Molson, the dissident cousin of Molson Inc. chairman Eric Molson. Onex has reportedly pledged $1-billion to Ian Molson's long-shot campaign to bid for the 218-year-old beer company and derail its proposed merger with Adolph Coors Co. of Golden, Colo.

If the effort succeeds, it would represent one of Mr. Schwartz's most high-profile victories as a deal-maker. But as with most things at Onex, it's complicated.

In an interview, Mr. Schwartz declined to talk about his company's interest in Molson, citing a "long-standing, straightforward policy of never commenting on anything that's speculated about Onex."

To acquire Molson, the Ian Molson-Onex group must overcome two obstacles, both equally daunting. The first is a legal obstacle. The brewery's current chairman, Eric Molson, controls enough voting shares to block any deal - or so it would appear - and he wants the Coors merger to happen.

So before spending millions on a bid of their own, the Onex-Ian Molson alliance will need a legal strategy for circumventing the controlling shareholder's power. "They're not going to come forward unless there's a realistic chance of succeeding," said a person familiar with Ian Molson's thinking on the matter.

The second obstacle is financial. Onex is probably best known for its failed takeover attempts of John Labatt Ltd. (1995) and Air Canada. But the company has made most of its money by investing in companies that were obscure, unloved, broken and cheap.

Sky Chefs, for example, on which it turned a $1.6-billion profit over 16 years, was nothing more than an airline catering company that American Airlines no longer wanted. Celestica is a big-name company now but, before Onex came along in 1996, it just was another piece in IBM's sprawling empire.

Onex bought into Loews Cineplex as part of the theatre chain's bankruptcy restructuring in 2001, invested a little more than $500-million (including assumed debt) and has nearly doubled its money 3½ years later.

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There's a clear blueprint at work here: Buy at a low price, using as little of your own capital as possible; cut costs; in many cases, install new management; shed superfluous assets; and focus on the core business.

An Onex subsidiary usually acquires industry competitors to achieve economies of scale, so it increases revenue while chopping millions more in expenses. That's how Onex has doubled or tripled the value of subsidiaries in a few years, before selling or going public at a huge profit.

Can Mr. Schwartz replicate this formula with Molson? Some observers are skeptical. "I don't see what he would see, frankly," says Martin Braun, president of Strategic Advisors Corp., who has known the Onex chief for years and holds Onex shares in a fund he manages. "It's not attractive as a [leveraged buyout]as far as I can tell. I think he's just kicking the tires."

Part of the problem is that most of the easy and obvious stuff has already been done; Molson CEO Dan O'Neill has pared tens of millions in costs and closed unneeded breweries in Regina, Sask., and Barrie, Ont. Nor does Molson have many surplus assets that could be sold, as Labatt did when Onex made its hostile, $2.3-billion run at the brewer almost a decade ago.

At the time, Labatt owned part of the Toronto Blue Jays, the SkyDome stadium and The Sports Network cable channel - all subsequently unloaded by eventual buyer Interbrew SA. But Molson has already sold all but 19.9 per cent of its ownership in the Montreal Canadiens hockey club, and the only obvious divestiture candidate is Kaiser, its floundering, 80-per-cent-owned brewery in Brazil.

Nor is Molson stock particularly cheap. From a deal-maker's perspective, the most relevant way to measure it is to look at enterprise value - market capitalization plus debt - and compare it to the cash flow a business can generate to pay off its debt. But Molson isn't a bargain by that yardstick. With a market cap of $4.1-billion, its enterprise value is about 10 times its most recent four quarters of earnings before interest, taxes, depreciation and amortization (EBITDA).

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(Labatt was taken over at price that represented eight times its EBITDA, according to figures compiled by Molson. Mr. Schwartz said he regrets not bidding more for Labatt when he had the chance. "We would have been prepared to raise the price," he says, but the pension fund with which he was allied was unwilling to pay more. "It turned out to be a great buy.")

There's a further complication: the threat by Coors to pull out of its joint-venture partnership in Canada with Molson if another buyer thwarts the merger. The partnership generates more than 20 per cent of Molson's operating profit in Canada, estimates Desjardins Securities analyst Keith Howlett.

Yet some investors still contend that if anyone can make Molson worth a lot more than it is today - and make a lot of money for himself in the process - it's someone like Gerry Schwartz.

"The thing that they do well, I think, is cut costs . . . and deal with stuff that needs to be dealt with in the businesses they're buying," says portfolio manager Mr. Burton. "A guy like Gerry can go in and say, 'Here's the core business, here's what it's worth, let's get rid of all this other stuff - underperforming assets, get rid of people, or whatever it is they do."

Certainly, the perception among many investors is that Molson can be managed much better than it is today.

"You get that a lot in these big companies," says Mr. Burton. "The core businesses underneath everything are good, generally - that's how they got so big. But they get fat."

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Mr. Schwartz would have an advantage in figuring out what to fix. His partner, Ian Molson, was on Molson's board for eight years until this June, and knows the company inside out.

The most popular theory is that if Molson winds up in the hands of Onex and Ian Molson, the group will sell Kaiser quickly (probably to Heineken NV, which already owns 20 per cent of it) and focus most of their efforts on two major problems in Canada: declining market share and its still-inefficient plants. Molson today represents less than 43 per cent of the Canadian beer market, down from nearly 47 per cent in 1996, and the erosion has been steady. That's why, despite Mr. O'Neill's efforts, Molson's five Canadian plants still operate at just 70 to 75 per cent of capacity.

Privately, some investors maintain that Molson's Canadian operations alone could be worth $40 a share if managed better - far more than today's share price for the whole company. If converted into an income trust, the value of Molson Canada could be even higher.

Buying Molson wouldn't give Onex the kind of payoff it received from buying Celestica just before the birth of the tech bubble. But it would also solve another problem for Mr. Schwartz: It would quickly put to work a chunk of that $3-billion in his pocket. There are only so many big deals to be had, and a lot of different private-equity buyers going after them.

And now that Onex has gotten so huge, Mr. Schwartz knows he has to make bigger and bigger gains to affect the company's stock price. With all of that cash, he says, you can expect to see Onex making more deals worth $500-million and up.

"If we bought something for $20-million, and in five years it was worth $60-million, that would be an excellent investment, as good as we've traditionally done," he said, seated in his downtown Toronto boardroom.

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"But for us to make $40-million over five years is going to move the needle about one-fifth of one per cent a year. So what we need to find are larger transactions with the kind of returns that we've been able to earn in the past."

Whether or not he gets Molson, many Onex watchers believe Mr. Schwartz is on the verge of radically re-shaping his company, changing its focus from managing its own investments to managing other people's money.

This year, Onex formed Onex Partners LP, a $2.2-billion private equity fund that has become the vehicle through which the firm has been making new investments. About $525-million of the money is Onex's; the rest comes from pension funds, banks or insurance companies hoping to profit from Mr. Schwartz's magic touch.

For Onex, the advantage of the partnership is that it gives it billions of dollars with which it can act quickly if a big deal comes along. In the past, the company had to arrange financial partners on a case-by-case basis - a process that was becoming increasingly difficult.

Now, instead of spending months finding and negotiating with other players, Onex can concentrate on trying to win the deal, confident that it has the money. "It kind of leapfrogs us into being able to . . . be credible in much larger transactions," he said.

Better still, the company, along with Mr. Schwartz and key company insiders, stands to earn millions in fees for running the partnership, particularly if it does well.

Onex will take an annual management fee worth about $32-million, as well as a performance fee if the returns are high; Mr. Schwartz and his staff receive 60 per cent of any bonus and Onex Corp. gets the other 40 per cent.

"Right now," adds Mr. Burton, the Mackenzie portfolio manager, "[Onex shares]sell at a 30 per cent discount to what they're worth [the net value of the company's assets]" But if Onex eventually holds most of its own investments through larger partnerships and becomes a pure private-equity manager, "they'll sell at no discount to what they're worth. Plus, people will value the income stream" derived from the management fees.

Mr. Schwartz says that's the game plan. "We can set up a real estate fund tomorrow morning. We can set up a distressed securities fund tomorrow afternoon." Onex will have no trouble finding places to invest its billions.

In the long run, it's not clear that Onex will remain a publicly traded company at all. Every other major buyout firm in North America is private, for one very good reason: its principals usually make obscene amounts of money, and thus prefer to avoid the scrutiny that comes with a public listing.

Mr. Schwartz's pay has long being a sore point with investors. From 1999 to 2001, Onex paid him more than $43-million in salary and bonuses. But that figure doesn't begin to describe his total compensation.

He has earned tens of millions more through stock options and a management investment program that awards him and other Onex insiders a piece of any deals they make. And if the Onex Partners fund is a huge success, Mr. Schwartz's bonuses could make his previous paycheques look like pocket money.

For now, he insists, going private is not on the agenda. But nor is fading away into retirement. "I feel the same level of interest as I always have in the business."

Six Case Studies

Gerry Schwartz's Onex has grown fat by following a clearly defined investment strategy: buy cheap, failing or unwanted companies; ruthlessly cut costs, change management, divest superfluous assets, focus on the core business - then sell, usually netting a hug capital gain.

Celestica

Onex bought: 1996

Total Onex investment: $262-million (as of Dec. 31, 2003)

Onex method: One of the world's largest makers of electronics, Onex bought it from IBM and later made more than 30 acquisitions of similar companies; closing plants and firing thousands of workers along the way. Though the business still loses money, Onex cashed out some Celestica shares during the technology boom, and at the end of 2003 its investment was worth $1.4-billion, including the value of its remaining 18-per-cent stake

Sky Chefs

Onex bought: 1984

Total Onex investment: $99-million

Onex method: Onex bought American Airlines' in-house food-service company and quickly sold part of the business to pay off debt. Sky Chefs went on an acquisition spree and became the biggest airline caterer in the world before Onex sold the last of its shares in 2001, just months before the 9/11 terrorist attacks crippled the airline industry. Total Onex profit: more than $1.6-billion.

BC Sugar

Onex bought: 1997

Total Onex investment: $74-million

Onex method: A classic Onex purchase; buy a cash-cow business in a mature industry and restructure for all it's worth. Onex outbid billionaire Jimmy Pattison for BC Sugar, replaced management, went public with a sugar income trust, and acquired Eastern Canada's Lantic Sugar to consolidate the sugar industry. Onex divested the last of its stake in 2003, and made about $180-million on the venture

Loews Cineplex

Onex bought: 2001

Total Onex investment: $534-million

Onex method: The North American theatre industry was a mess when Onex bought in, thanks to the debt from building giant megaplexes with many screens. Onex nabbed its Loews stake in bankruptcy court, restructured the debt, closed older, less-popular movie houses and began its exit. The Canadian theatres were spun into an income trust, in which Onex still owns a minority position, and the rest was sold last week for $2-million.

Purolator Courier

Onex bought: 1987

Total Onex investment: $86-million

Onex method: Purolator Courier was one of Onex's earliest investments and historically one of its least successful. It struggled through the deep recession of the early 1990s until Mr. Schwartz, shopping it far and wide, finally found a company willing to pay enough for it that he could still make a slim profit. That company was Canada Post. In the end, Onex earned a paltry $20-million.

Molson

Onex method: Onex has pledged $1-billion to a group headed by Ian Molson that is considering a bid for Canada's largest brewer, sources say. Mr. Schwartz likes the beer business - he made a run at Labatt in 1995 and missed - because it has what ever leveraged buyout needs: a steady stream of cash flow. Bay Street thinks he would jettison Cervajarias Kaiser Brasil SA, Molson's floundering Brazil operations, and, perhaps, turn the Canadian brewer into an income trust.

Onex 2003 revenue, by industry

Electronics manufacturing: $9.4-billion

Auto parts: $4.7-billion

Movie theatres: $1.8-billion

Call centres/customer management: $605-million

Other: $626-million

TOTAL: $17.1-billion

Onex 2003 revenue, by geography

United States: 37%

Europe: 22%

CANADA: 17%

Other: 24%

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