Look out Canada: Hungry hedge funds are circling |
Date: Saturday, January 27, 2007
Author: Eric Reguly, Globe and Mail
When Hollywood fastens onto a trend, watch out. It may be a sign the trend has peaked or fading. Hedge fund managers beware. Doug Ellin, the creator of the HBO's Entourage, the hit comedy about the fast money and fast lives of young Hollywood actors, hopes to repeat his success with a series on hedge fund hotshots and the sinful amounts they make.
Middle-aged traders and fund managers know all about the Hollywood curse, which is like the magazine curse -- once your cheesy grin makes the cover you're doomed, because media fame is a trusty lagging indicator. One of the better Hollywood examples was the movie Wall Street, about the life of a greedy young trader. It went into production in the spring of 1987. A slight market correction called Black Monday came a few months later.
Eric Rosenfeld, the chief executive officer of Crescendo Partners, one of the more aggressive New York hedge funds, appeared at a hedgie show-and-tell in Montreal this week, put on by the Quebec arm of the Canadian Financial Relations Institute (I was the event's moderator). The man who put Canadian software company Geac into play admitted with a laugh to being slightly spooked by the news of the HBO series, but otherwise thought the hedge funds have little to worry about. Canada is especially fertile grazing ground for the hedgies, he said. The game north of the border is just getting started.
Another presenter, Craig Thorburn, the M&A guru at Blake Cassels & Graydon in Toronto, had a similar view. He said the hedge funds and their oft-time allies, the private equity funds, are set for a feeding frenzy. A deal he recently worked on attracted 30 bidders, 27 of which were private equity funds. You could assume that most of them were American.
Hedge and private equity funds are a force of nature that could turn Corporate Canada upside down. The former are adept at putting undervalued companies into play. The latter swoop in to buy them. This is precisely what happened in 2005 when Carl Icahn made a partial bid for Fairmont Hotels, the owner of Toronto's Royal York. Fairmont was ultimately bought at a higher price by Colony Capital and Kingdom Hotels.
The world has about 10,000 hedge funds on the prowl, with $1.2-trillion (U.S.) in collective firepower. The private equity funds spent about $660-billion last year, alone, to buy companies. The Wall Street Journal says they are sitting on $750-billion of unused funds. The money has to be spent or the rich hedge and private equity fund fees won't get paid.
Nothing is off limits, Mr. Rosenfeld and Mr. Thorburn said, though companies with multiple-voting shares, such as the cable and most media players, might be bridges too far. Canada is particularly attractive not only because it is sparsely trodden ground, compared with the United States, but also because the rules governing corporate behaviour are a predator's delight.
Take shareholders' meetings. In the United States, meetings to consider investment or takeover proposals, turf directors, and the like, can't be held unless the holders of at least 10 per cent of the voting shares get together with a requisition. In some states, the threshold is much higher. In Canada, the figure is 5 per cent. "With 5 per cent, three or four months later there will be a day of reckoning for management," Mr. Rosenfeld said.
There's more. In the United States, boards of directors with staggered terms make it exceedingly hard to launch proxy fights. In Canada, proxy fights are easier because all directors come up for election at the same time. In the United States, poison pills can be powerful and enduring. Poison pills are common in Canada too but are generally employed to buy management some time, not kill deals. Predators also like the ability to build a 10-per-cent stake in a Canadian company before the ownership has to be disclosed.
It's 5 per cent in the U.S.
Add all this to the fact that Canada is less picked-over than the United States and you have a recipe for a hedge and private equity fund feeding frenzy. Better yet (for the American barbarians at the gate), the Canadians offer little competition. At last count, there were only about 200 Canadian hedge funds managing less than $30-billion (Canadian). By global standards, that's irrelevant. Goldman Sachs alone deploys more hedge fund loot than all of Canada.
Recently, the Canadian stock market has been whipped by rumours that Telus, Talisman and Nexen, among many others, are takeover targets and that the hot money could play a role in each of the potential takeovers. The rumours are credible. Huge takeover premiums have fattened the portfolios of Canadian investors of every description and more fattening is sure to come. That's the good news. The bad news is that Canada seems on the verge of a corporate gutting like it's never seen before.
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