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Dissident shareholder's intentions questioned in EnerCare proxy battle

Arpad Benedek/Arpad Benedek/iStockphoto

Octavian Advisors, the activist shareholder hoping to shake up the board of directors at EnerCare Inc. , has been hit with a second stinging rebuke after another major advisory firm rejected its proposal.

The activist first bought EnerCare shares in February 2010 and has since built up a 13 per cent stake. With this position, Octavian has requested a shareholder vote in hope of expanding the size of EnerCare's board to 10 directors, and has put forward a proposal to four elect of its Octavian's own nominees.

In support, Octavian's cited the following arguments: between EnerCare's initial public offering in 2002 and December 9, 2011, the last trading day before a vote was requisitioned, EnerCare's shares were down 11 per cent while the S&P/TSX Composite Index had climbed 78 per cent; EnerCare had missed opportunities to sell the company both in 2007 and 2010; and EnerCare made a bad acquisition in 2009.

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Given this supposed underperformance, a few more U.S. hedge funds who smelled blood have since climbed on board, and they support not only electing Octavian's board nominees, but also the potential for paying a special dividend or selling the company.

Both Glass-Lewis and Institutional Shareholder Services, the shareholder advisory firms, have reviewed both sides' arguments, and they each sided with EnerCare. The first reason why: though straight capital gains since the IPO have been weak, total returns, including dividends, equate to 109 per cent since the IPO, versus the TSX's total return of 126 per cent. And the one-year, three-year, and five-year total returns all beat the TSX.

"While the Company's total return has lagged that of the index over the period since public trading of its shares began (17.0% differential), the relative underperformance is not so large as to suggest egregious mismanagement, in our view," Glass-Lewis noted.

And though EnerCare undoubtedly ran into trouble coming out of the financial crisis, Glass-Lewis said a lot of the problems stemmed from extraordinary items and deferred taxes. "Underlying business fundamentals appear sound and in-line with the Company's stated strategic initiatives focused on top-line revenue growth including geographic and product expansion," the firm said, with ISS supporting a similar view.

As for the argument that EnerCare had the opportunity to sell to Macquarie in 2010 for $6.45 a share, it isn't very strong considering that EnerCare is now trading at $9.67. And Octavian also argues that management has been more or less selfish when it didn't sell in 2007 at a high valuation. EnerCare's chief executive officer John Macdonald calls that argument a "low blow." "It's very conceptual," he said. "The truth is, there was just no offer like that in the cards."

The arguments in favour of a special dividend or selling the company now are also viewed as skeptical -- at least by company management. EnerCare already pays a 6.8 per cent dividend yield, and the company would likely have to tack on new debt to payout the dividend. As for the takeover, there is buzz that Octavian may only want one because it would be the easiest way to get out of its position. EnerCare's average daily trading volume over the past year is about 150,000 shares out of a 57 million share float. Plus, at a 6.8 per cent yield, a suitor would have to pay a hefty premium to make it worthwhile for the retail shareholders.

Still, both advisory firms want management to keep the options open, and won't bash them out right. But they're against the board shake up. "While the dissident's suggestions of a spin-off, buyback, special dividend, or sale may be promising – and are certainly items that all boards should regularly evaluate – on balance the dissident has not proved that the board has acted imprudently, or that change at the board level is needed," ISS wrote.

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EnerCare is involved in both the rental of water heaters and the sub-metering of electricity and water consumption in individual units. It currently has a market capitalization around $540-million.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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