The definitive warning shot in the unexpected battle between Corus Entertainment Inc. and Catalyst Capital Group Inc. landed in Doug Murphy's inbox at 9:24 p.m. on Feb. 16.
Earlier that day, the Corus CEO had met with Catalyst partner Gabriel de Alba in a cordial sit-down to discuss the private equity fund's concerns with his proposed $2.65-billion acquisition of Shaw Media, which includes the Global television network and a stable of specialty channels.
By night, the tone had changed dramatically.
In a lengthy, testy e-mail, Mr. de Alba made it clear Catalyst was preparing an onslaught.
The three-page missive alleged Corus's board acted improperly, and argued that the deal was "highly abusive to minority shareholders."
Catalyst is a minor Corus shareholder and seems to have little skin in the game, but its aggressive tone, coupled with its public campaign to derail the deal this week, have left many questioning the private equity fund's motives.
Corus's decision to fight back rather than ignore the allegations, calling them "deeply misleading," could be driven in part by a unique wrinkle in the deal's structure. Shaw Media's owner, Shaw Communications Inc., will use the sale proceeds to fund its $1.6-billion acquisition of wireless startup Wind Mobile Corp. in December. But because both Corus and Shaw Communications are controlled by the same family – the Shaws – a majority of Corus minority shareholders must first approve the Shaw Media purchase.
That gives the minority unusual power and Catalyst has swooped in to take advantage. Its goal is to get Corus to pay less for Shaw Media.
Catalyst claims it saw an opportunity when the Corus share price fell following the Jan. 13 announcement, a drop it attributes to "the misallocation" of the sale price. The firm bought in with the specific intent of advocating for changes to the deal's structure.
"In a nutshell, we believe that the opportunity to become activist on this name will allow us to rebuild value for our investment," Mr. de Alba said in an interview Friday. With the shares taking a beating, "that became the opportunity."
So far, Catalyst's efforts have largely been met with skepticism. On a conference call Friday, Jayme Wiggins, a portfolio manager at Intrepid Capital, which owns more than two million shares in Corus, attempted to poke a hole in Catalyst's underlying argument.
"You guys seem to think that if the minority shareholders vote down the deal, Shaw will willingly accept a lower price," he said. "We think they'll just walk away."
That Catalyst is pouncing on the leverage it sees in the Shaw-Wind deal aligns with its aggressive reputation. Founded in 2002 by Newton Glassman, a former managing director at New York-based Cerberus Capital Management, Catalyst has a history of being pushy – often using legal actions to eke out any possible advantage over its opponents. Recently, the firm sought to have a former employee jailed for allegedly giving information to a rival.
Catalyst's tactics have had the effect of alienating and frustrating people on the other side of the table. Those who have done business with the firm are reluctant to publicly comment, but two recent transactions illustrate the methods the firm will use to achieve its ends.
Catalyst quietly amassed a position in wireless startup Mobilicity, buying some of the financially stressed carrier's bonds at a discount before it filed for creditor protection in 2013. The firm went to court to block a refinancing deal backed by a group of bondholders that controlled the majority of Mobilicity's debt. Animosity between Catalyst and the opposing group of bondholders grew over the following two years throughout Mobilicity's formal creditor protection proceeding. When the company was sold to Rogers Communications Inc. for $465-million last summer, Catalyst negotiated its own payout separate from the rest of Mobilicity's creditors, handing the firm something of a victory.
Catalyst had also attempted to win control of new entrant carrier Wind Mobile. But Wind's foreign backers ultimately sold the company to a consortium of investors led by rival Canadian fund West Face Capital. This deal rankled Catalyst.
In 2014, Catalyst alleged that a former low-level analyst who quit to join West Face provided critical information about Catalyst's strategy and operations including efforts to buy into Wind. At various points, Catalyst asked the court to jail the analyst for alleged contempt and requested an injunction to prevent West Face from "participating in the management and/or strategic direction of Wind Mobile," and from participating in the federal spectrum auction in early 2015.
Later, Catalyst personally sued West Face head Greg Boland, alleging he was sullying the reputation of a related entity, called Callidus Capital, in private on Bay Street. Mr. Boland, who declined to comment for this story, denied the allegations and the case is still in court.
However, Mr. Boland scored a victory when Shaw Communications announced its $1.6-billion acquisition of Wind. Exact figures on how much he made are not public, but West Face was one of the biggest investors when Wind was purchased for an estimated $300-million in the fall of 2014.
The back and forth didn't end there. Because of the ongoing court fight over the analyst hire, Catalyst claimed a constructive trust – a form of ownership – over West Face's interest in Wind, which would prevent Mr. Boland's firm from collecting its proceeds from the sale to Shaw. In February, Catalyst agreed to drop that claim and Wind Mobile's sale to Shaw is expected to close on Tuesday, but that agreement was reached only after Ontario Superior Court Justice Frank Newbould took the rare step of commenting publicly on Catalyst's tactics.
In a late January decision, he noted that Catalyst's lawsuit over the junior analyst "at this stage looks weak," and he characterized the fund's drawn-out approach, which has involved bringing an appeal in the wrong court and filing documents late, as a calculated strategy.
"I can only conclude that Catalyst has purposely delayed its claim against West Face for tactical reasons," he wrote. "As long as a claim for an order of a constructive trust against the shares of [Wind Mobile] held by West Face is outstanding, Catalyst knows that West Face cannot realistically sell those shares."
Justice Newbould remarked of another element of Catalyst's claim that "to lie in the weeds until the hearing of the application and assert such a right to stop the plan of arrangement is troubling indeed and not acting in good faith. Waiting and seeing how things are going in the litigation process before springing a new theory at the last moment is not to be encouraged."
While Catalyst's strategy to disrupt Corus's acquisition of Shaw Media isn't identical, its approach follows a similar playbook. Many of its allegations as to why Corus's minority shareholders should block it, which include the notion that the Shaw family benefits unfairly and that Corus was late in appointing a special committee to oversee the deal, have been questioned by analysts and investors.
On Catalyst's investor call, Ben Cubitt, a portfolio manager at Samara Capital, raised what he called "an elephant in the room": Catalyst's long and bitter history with Wind.
"Is it personal?" he asked. "It can't be for economic reasons for such a small investment."
Mr. de Alba denied any link between Catalyst's activism against the Corus-Shaw deal and its history with Wind. "What you're describing is a beautiful soap opera that I think Corus could take out and put on their women's TV channel," he said, adding that it has "nothing to do with the realities of this deal."
Judging by the backlash on the call Friday, it appears the best case Catalyst has to get shareholders to vote the deal down is to zero in on the claim that Corus is overpaying – one of the few arguments other investors appear willing to at least hear out.
But rallying enough votes will be an uphill battle. Catalyst says the deal is priced at 8.6 times Shaw Media's earnings before interest, taxes, depreciation and amortization (EBITDA), rather than 7.7 times as Corus initially claimed. But Barclays Capital Canada Inc., which was hired to give a fairness opinion, also used this higher multiple when running the numbers and still signed off on the richer price, which Catalyst's marketing materials did not acknowledge. In addition, two independent proxy firms have recommended that shareholders vote for the deal.
"The multiple that we paid was a fair multiple based on a lot of good, hard analysis on many deals," Corus CEO Mr. Murphy said in an interview earlier this week. "I really can't speak to what [Catalyst's] end game is."
Minority shareholders will get their say on March 9.