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Telus won't concede defeat on plan to consolidate shares

A pedestrian is reflected in the window of a Telus store while using a mobile phone in Ottawa February 11, 2011.

© Chris Wattie / Reuters/Chris Wattie /REUTERS

Telus Corp. may have been outfoxed by a cunning U.S. hedge fund, but its top executive is not ready to admit defeat.

Just hours after the Vancouver-based telecommunications giant withdrew its proposal to collapse its dual-class share structure, chief executive officer Darren Entwistle came out swinging, vowing that shareholders haven't seen the last of the plan.

Addressing investors at the company's annual meeting in Edmonton, Mr. Entwistle said Telus is already plotting an alternative plan. While mum on the details, he served notice that the company would not alter the basic terms of the original deal, which would have given a vote to the company's non-voting shareholders with no extra payment to the voting shareholders.

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Telus has for years used an antiquated share structure in which nearly half of its equity investors were disenfranchised. The proposal would have ended that system, giving every share an equal vote, in a bid to make itself more attractive to investors. The idea was to reduce Telus's cost of capital and put it on an even footing with rival BCE Inc., which uses a one-share, one-vote structure.

But the plan, which was uncontroversial when it was first announced in February, ran into an obstacle when New York hedge fund Mason Capital Management LLC revealed it controlled nearly 19 per cent of the voting stock and opposed the idea. It argued that converting non-voting shares to voting shares at a one-for-one ratio was unfair because it set the non-voting class up for an unjustifiable windfall. Those shares have historically traded at a lower price.

But while Telus had to withdraw its plan in the face of certain defeat, Mr. Entwistle suggested he is prepared for further combat with Mason.

"We're intent on seeing it through with a one-to-one conversion – that is the only conversion ratio that is plausible for the Telus organization," Mr. Entwistle said during a telephone interview following the meeting.

"We'll disclose the path that we are going to follow in due course and hopefully that won't be in the too-far future."

In a statement, Mason said: "We thank the many voting shareholders who voted against the proposal. Many have expressed that they paid a higher price for the rights and privileges that come with voting shares and believed that this proposal dilutes this valuable right without compensation."

And while Telus indicated it was gearing up for round two, Mason cautioned that it could be a thorn in management's side for a long time to come: "There is no reason to assume that Mason Capital will not be a long-term shareholder of Telus."

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Mason, though, has less than a 0.25-per-cent net economic interest in Telus, because it has a short position in Telus non-voting shares that is almost as large as its ownership of voting shares. The firm was using a trading strategy to exploit the historical price gap between the two share classes. Mason was betting that if it blocked the proposal, Telus's non-voting shares would likely fall, relative to the voting shares, causing the spread to widen and allowing it to reap a profit.

That is exactly what happened Wednesday: Telus voting shares declined 3 cents, or 0.05 per cent, to $58.13. The non-voting shares dropped more, falling 85 cents, or 1.5 per cent, to $56.15.

As a result, Telus has accused the firm of being an unscrupulous "interloper" for using a tactic called "empty voting," which is voting without an economic interest, to defeat the proposal for a tidy profit.

"I'm not saying, to be clear, that what Mason did was illegal. I find it morally objectionable," said Mr. Entwistle. "And I find it a great example of what is wrong within the capital markets and I think it is area where securities regulators need to step in."

Telus's dual-class share structure dates back to the 1998 merger of Telus Corp. and BC Telecom. In order to pass, Telus's plan would have needed to clinch the approval of two-thirds of the votes cast by each class of shareholder.

The proxy battle between the two sides has raged for weeks and Telus's sudden about-face on the issue also overshadowed the release of its latest financial results. Its first-quarter profit rose by more than 6 per cent to $348-million from $328-million during the same period last year.

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On an earnings-per-share basis, Telus's profit amounted to $1.07 versus year-ago $1.01. Operating revenue, meanwhile, rose by 4 per cent to $2.63-billion.

Telus (T-T)

Close: $58.13, down 3¢

Telus (T.A)

Close: $56.15, down 85¢

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