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Magna proposal would send shares soaring if approved, tumbling if not: analysts

Date: Thursday, June 24, 2010
Author: Investment Executive

Magna International Inc.’s share price may skyrocket by as much as 17% if a proposal to buy out founder Frank Stronach’s voting control of the auto parts giant is approved by shareholders, analysts say.

One analyst described the plan, which has been the subject of much brouhaha due to the enormous premium it would pay Stronach, as “short-term pain for long-term gain.”

“While we concede that the terms of the proposal could be more compelling, we believe approval of the transaction is net positive over the long term on a number of fronts,” UBS analyst Tasneem Azim wrote in a research note.

Azim predicted the deal could send Magna’s share price soaring by approximately 17% from its current level, closing a long-standing valuation gap between the company and its peers and adding approximately $2 billion to the company’s value. However, if an attempt to block a shareholder vote is successful, the share price could drop five to 10% from its current level, he added.

Azim has a 12-month price target of $84 for Magna’s shares (TSX:MG.A), which added $1.43 or more than 2% to $70.72 in Tuesday trading on the Toronto Stock Exchange. The move followed a report that more than half of Magna’s common shareholders have already sent in their votes, and of those, a vast majority support the plan.

Analyst Sara O’Brien with RBC Capital Markets issued a similar prediction, saying Magna’s shares could climb to $79 if the deal is approved, but could drop into the high-$50 range if it isn’t.

“While we believe the deal with the Stronach Trust is a high price to pay for subordinated shareholders, we now see more upside potential from the deal passing a vote than downside risk to the shares at status quo,” O’Brien wrote in a research note Tuesday.

Many institutional investors shun companies with dual-class share structures such as Magna’s, which give one group of shareholders -- often the company’s founding family -- voting control without a majority equity interest.

However, Magna has come under fire from shareholders, regulators and investors’ rights groups over its proposal to buy out Stronach’s special voting shares for US$300 million and nine million common shares worth about C$643 million -- a premium of approximately 1,800%.

Detractors have accused the company of failing to provide enough information for shareholders to make an informed decision when they are asked to vote on the plan. Magna’s board hasn’t recommended how shareholders should vote, as is usually the case in transactions like this. An opinion on the fairness of the deal hasn’t been issued, nor have details on how the company arrived at the premium to be paid to Stronach.

The Ontario Securities Commission will hold a hearing Wednesday and Thursday to determine whether the proposal should be quashed. The regulator has called the proposal “contrary to the public interest and harmful to the integrity of the Ontario capital markets.”

O’Brien said the OSC hearing has four possible outcomes:

- Allow a shareholder vote scheduled for Monday to go ahead;

- Defer the vote until Magna’s board provides more information;

- Opposing shareholders could negotiate a deal with the Stronach Trust that is less dilutive to the company’s common shares;

- The Stronach Trust could scrap the proposal and return to the status quo.

However, it’s widely believed the vote will eventually be held and, when it is, shareholders will approve the proposal.

If this happens, Stronach will lose his voting control of the company but this will ultimately make little difference in how the auto parts giant is run, said David Tyerman, auto parts analyst at Genuity Capital Markets.

“The company has been running in a pretty normal manner and probably will continue to do so going forward,” Tyerman said in an interview Tuesday.

“I don’t think Mr. Stronach has been making decisions in the last few years that would be much different than the management team has.”

This means Magna’s recent strategies of expansion into Russia and other non-traditional markets, as well as diversifying into products outside the automotive market, will continue apace whether or not Stronach and his family retain voting control over the company.

Tyerman said the one thing Magna’s management may be able to do without Stronach’s veto power is take on more debt to make acquisitions.

“He definitely was a proponent of a very, very conservative balance sheet and management seems to be willing to take a little bit more financial leverage,” he said.

The OSC will hear from several shareholders both for and against the proposal at this week’s hearing before it issues its decision. Another shareholder, Mason Capital Management LLC, was granted limited standing Tuesday.

If the proposal is approved, it will also create a new joint venture with the Stronach group, to be 73% owned by Magna and run by Frank Stronach, that would develop electric vehicles and their components.