Magna International Inc. chairman Frank StronachINA FASSBENDER
Frank Stronach is surrendering control of the auto parts powerhouse he has ruled for decades with an iron grip, leaving one of Canada's premier companies without a major shareholder and potentially vulnerable to a takeover.
The end of the Stronach era at Magna will come if shareholders approve an $863-million (U.S.) deal to buy out the multiple-voting shares through which he exerted control of Magna, after which it would become a widely held company in which Mr. Stronach will hold 7.44 per cent.
"It took a lot of reflection, a lot of soul searching," he said Thursday in describing his decision to agree to a management proposal to pay him $300-million and nine million class A shares in return for surrendering the multiple voting class B shares first issued in 1978.
The deal would leave one of the few remaining world-class Canadian companies without a single dominant shareholder - and possibly open to bids from any entity seeking to acquire one of the world's leading auto parts makers. Magna shares soared 14 per cent.
Though Mr. Stronach has preached for years about the need to shelter entrepreneurial companies such as Magna from the influence of institutional shareholders concerned only about short-term financial performance, he appeared to have little concern about the possibility of the company he founded in 1957 being left in control of public investors.
"The shareholders are intelligent enough with large research departments. It's up to them to decide," he said after Magna's annual meeting at a suburban Toronto hotel.
"We still have a strong voice because we have a lot of shares," he said.
Senior executives and confidants of the 77-year-old entrepreneur described the proposal as part of a succession planning process he has been mulling for months.
Mr. Stronach will remain chairman of Magna and receive consulting fees for the next four years. The $863-million deal pegs the value of the 726,829 class B shares controlled by the Stronach Trust at an eye-popping $1,187 apiece.
In a key piece of the deal, he will lead Magna E-car systems, the new Magna division created to develop components for electric vehicles. He will pump $80-million in cash into a joint venture with Magna and pick up a 27-per-cent stake. Magna will contribute $220-million in cash and assets for a 73 per cent stake.
"I said to management this deal will only pass if I have absolutely the right hand to call the shots and get all the people which I think can lead this," Mr. Stronach told the annual meeting.
Senior managers appear to differ with their boss, however, about whether electric vehicles will be a huge success soon.
Mr. Stronach told The Globe and Mail on Tuesday that he thinks electric vehicles could generate $20-billion in revenue for Magna in 10 years.
But Don Walker, co-chief executive officer of Magna, said Thursday he doesn't believe it will be a huge business for years.
"I think the real growth opportunity for Magna, quite frankly, is looking at the trends in the industry," Mr. Walker said. "The big growth area is going to be in our core groups and that is what is going to drive us forward."
Some of those core groups are metal bashing, interior and exterior components and complete vehicle assembly on a contract basis for several auto makers.
Senior managers approached Mr. Stronach with the proposal in March, chief financial officer Vince Galifi said in an interview.
"He's been thinking about succession for a long time. We didn't plan for it to be there in March, it just happened that way. We had a few iterations back and forth."
In early April, the proposal went to Magna's board, which struck a special committee that approved the deal.
But even as Mr. Galifi was involved in discussions with Mr. Stronach, he was hearing from shareholders, reiterating complaints they have made for years about Magna's dual share structure and how it kept the value of the single-vote class A shares low.
"I was on the road … back in early March and I had a number of investor meetings and this kept on coming up. This theme has been around for a very long time."
Joyous investors pushed up the value of Magna's common shares $8.99 (Canadian) to $73.26 in trading on the Toronto Stock Exchange, its biggest one-day gain in almost two decades.
Analysts also applauded.
"I am extremely pleased to see this happen," said David Tyerman, who follows Magna for Genuity Capital Markets in Toronto. "I never believed I would see it."
Mr. Walker responded that he has been at Magna for 23 years and "I think I would echo your comments."
Mr. Stronach likely commanded a higher premium for his control stake than his daughter Belinda Stronach would receive if she were to inherit the Stronach family's stake and then sell it a few years later, a person familiar with Magna said.
Succession planning has been on Mr. Stronach's mind for some time, sources said.
He said in an interview on Tuesday that he is healthy and has no desire to leave the business, but added: "I realize I can't manage the company from the grave."