Telus renews fight with hedge fund Mason Capital

Date: Wednesday, August 22, 2012
Author: Boyd Erman and Rita Trichur, The Globe and Mail

Telus Corp. is escalating its war with a U.S. hedge fund by reviving a plan to give all of its shareholders equal voting rights, despite the failure of a similar proposal in the spring.

The Vancouver-based telecommunications firm said Tuesday it will ask investors to cast ballots on a plan to collapse its dual-class share structure at a special meeting on Oct. 17. This time, however, it is lowering the bar for success: A simple majority of votes cast by owners of voting shares will be enough for the measure to pass, rather than the previous hurdle of two-thirds.

Telus has been trying for months to abolish its current share structure, which denies the holders of about 151 million non-voting shares the right to have a say in the election of the board and other matters.

At stake is hundreds of millions of dollars. The non-voting shares always trade at a lower price than the voting stock. If the Telus plan were to pass, that discount would be eliminated, putting $244-million in the pockets of non-voting shareholders, based on Tuesday’s closing prices.

But the company has run into an obstacle in Mason Capital Management LLC, the New York investment firm that is the largest single owner of Telus voting shares, with nearly 20 per cent. Mason is stridently opposed to the company’s plan, arguing that if voting shareholders are going to share control of the business with non-voting shareholders, they should be compensated for doing so.

Telus wants to pay the voting shareholders no premium.

Mason’s large stake was enough to stop Telus’s earlier attempt to do the share conversion. Facing certain defeat, the telecom company yanked that proposal just hours before a scheduled shareholder vote at its annual general meeting.

But the telecom company said the approval threshold in its new plan – 50 per cent plus one – is consistent with corporate law. It also stressed that voting shareholders would not see their legal rights change.

“The reality is we could have done this last time,” said chief financial officer Robert McFarlane. “We didn’t focus on [this] approach because when we were designing the prior proposal, quite frankly, we weren’t expecting a hedge fund opponent being opposed to the long-term interests of shareholders.”

He said the company’s executives began formulating this backup proposal in April, prior to the annual general meeting, in response to Mason’s “empty voting strategy” that saw the hedge fund obtain a short position in Telus non-voting shares that is almost as large as its ownership of voting shares. It is a trading strategy that exploits the historical price gap between the two share classes, and seeks to perpetuate or widen that gap.

Mason denounced the move on Tuesday evening. “Telus' new proposal to collapse the shares on a one-for-one ratio is the very same proposal that was rejected by shareholders a few short months ago, except that Telus appears to be attempting to circumvent the protections afforded to the voting shareholders under law,” Michael Martino, principal and co-founder of Mason Capital said in a statement.

“Mason will vigorously oppose Telus' latest attempt to take value from voting shareholders and transfer it to the non-voting shareholders, including the board and Telus executives whose personal economic interests are tied to the non-voting stock."

Earlier in the day, co-founder Mr. Martino reiterated his view that voting shareholders deserved a premium because those shares have historically traded at a higher price.

The firm wants voting shareholders to vote on a change to the company’s bylaws to require that any share conversion give voting shareholders a premium. It is proposing a premium valuation of at least 4.75 per cent – which represents the historical average trading premium of the voting shares over the non-voting shares – or an enhanced minimum premium of 8 per cent.

“We’d rather have our votes than give them up for nothing,” Mr. Martino said.

Telus’s board, though, rejected Mason’s request to convene its own on meeting of voting shareholders.

Telus has about 175 million voting shares and 151 million non-voting shares issued and outstanding. Following the share conversion, the company’s voting shares will be listed on the New York Stock Exchange for the first time.

Prior to the company’s announcement after the close of markets, the spread between the two share classes was $1.62 – giving a 2.6-per-cent premium for the voting shares.

“Mason Capital may try and fight the proposal legally, but a simple majority of voting/common shares would seem far more achievable for Telus,” Dvai Ghose, an analyst at Canaccord Genuity, said in a research note.