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Proxy battle looms at auto parts maker Martinrea

Nat Rea, who sat on the company’s board for a decade, is preparing to take the next step in a campaign that began when he launched a lawsuit in September that accused company officers and directors of corrupt practices and breaching fiduciary duties.

Charla Jones/The Globe and Mail

A former executive and director of Martinrea International Inc. plans to ask investors to replace most of the board of one of Canada's largest auto-parts makers.

Nat Rea, who sat on the company's board for a decade, is preparing to take the next step in a campaign that began when he launched a lawsuit in September that accused company officers and directors of corrupt practices and breaching fiduciary duties.

The legal fight intensified after Martinrea rejected the allegations and countersued Mr. Rea. In the months since, Martinrea undertook a forensic audit. The company said on Monday that the review found no need to alter financial statements from previous periods. The company also announced that its chief executive officer would be leaving.

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Now, Mr. Rea has hired lawyers and advisers and is said to be assembling a slate of directors to stand for election at Martinrea's next annual meeting. The slate includes veterans from rival auto parts maker Magna International Inc., including former CEO Manfred Gingl. Mr. Rea is expected to argue that the company's shares can be boosted by lowering debt, cutting costs and rejigging pay to reflect profits, said a person familiar with the plans.

Mr. Rea confirmed his plans in a press release issued Thursday morning, which outlined his proposals and his five-director slate.

"We intend to select a board chair who is a proven leader in the automotive industry, with decades of experience and a track record of creating shareholder value," Mr. Rea said in the statement.

The company's executive chairman and chief financial officer did not immediately respond to calls Thursday morning seeking comment on Mr. Rea's plans.

The stock has already jumped 23 per cent this week, in the wake of Monday's announcement of the CEO's departure and Martinrea's earnings report. Martinrea reported record annual revenue of $3.2-billion for 2013.

The company's executive chairman, Rob Wildeboer, said the company's focus in the coming year would be "on operational and financial improvement across the company over time, good capital allocation decisions, and prudent, profitable growth."

Some analysts reacted positively to Monday's developments, with CIBC's Todd Coupland saying in a report that the audit's findings, departure of the CEO and news on margins were "all positive surprises to varying degrees. Investors can now focus on Martinrea's fundamentals, which should lead to higher valuation. We believe Martinrea is undervalued and should be bought."

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Martinrea is a classic metal basher that stamps out such components as control arms for Fiat 500 subcompacts made in Mexico and aluminum sub frames in Germany for Jaguar Land Rover vehicles. The company is based in suburban Toronto and has a market capitalization of almost $1-billion.

Martinrea shareholders have not benefited as much as those of Linamar Corp. and Magna, both of which have ridden the buoyant North American auto production recovery to record high share prices.

The price of Linamar shares has risen more than 1,000 per cent since the depth of the downturn in 2009, compared with 418 per cent for Magna shares and 137 per cent for Martinrea.

In a recent report, BMO Nesbitt Burns Inc. analyst Peter Sklar said he was "concerned that there may be a pattern of operational issues and equipment failures at Martinrea out of the norm." He said that Martinrea's debt "is in excess of the other Canadian auto-parts companies, which we believe elevates the risk profile of the stock."

Mr. Sklar has an underperform rating on Martinrea. Mr. Coupland of CIBC and the other five analysts tracked by Bloomberg rate the company a buy.

In addition to Mr. Rea and Mr. Gingl, the other members of the dissident slate include Sandra Levy, a former Magna human resources executive, and Roland Nimmo, who was vice-president of internal audit for Magna.

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The final nominee is Paul Smith, the chairman of Via Rail Canada and a founder of Equity Financial Holdings.

Mr. Rea joined Martinrea when he sold his own auto-parts company to Martinrea in 2002. He was a vice-chairman of the company until June 2012, when, according to the company, "his employment was terminated" and he resigned as a director.

The dissident will require a lot of support from other shareholders, as his personal stake is relatively small. He owns 100,000 shares, or about $1.1-million worth of stock. That's about 0.1 per cent of the company.

The company is likely already aware that it needs a new boss who is focused on increasing returns for shareholders, Mr. Coupland said in his report.

"Despite the forensic audit having vindicated the company and CEO, the decision to step down likely came about from pressure by dissentient shareholders unhappy about the allegations and underperformance of Martinrea's North American margins and discount valuation. Our view is that the board will be mindful of these points and select a new CEO that will be highly motivated toward operational improvements, higher margins, EPS [earnings per share] and share price."

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About the Author
Auto and Steel Industry Reporter

Greg Keenan has covered the automotive and steel industries for The Globe and Mail since 1995. He also writes about broader manufacturing trends. He is a graduate of the University of Toronto and of the University of Western Ontario School of Journalism. More


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