The Telus Tower in downtown Toronto.Fred Lum/The Globe and Mail
The market's early scoring of the latest round in the showdown between Telus Corp. and hedge fund Mason Capital has the telecom company winning on points.
Telus on Tuesday said it would once again try to collapse its dual share class structure on a one-for-one basis, a move Mason opposes. Telus also said that it rejected Mason's request to hold a shareholder meeting to enshrine in Telus's articles a rule that would ensure that Mason and other voting shareholders get more in a collapse than non-voting shareholders. The market's early reaction signals the fight is tilting back Telus's way.
In for the long haul
Mason and Telus have been in combat since the spring, when Mason bought almost one-fifth of the company's voting shares and said it would fight the share collapse plan. The hedge fund won the first round when Telus withdrew the plan in May.
Mason has set up its trade to make money when the spread between the voting stock and the non-voting stock widens. A successful one-for-one collapse would mean the worst-case scenario. Wednesday morning, Telus's gambits from Tuesday night were costing Mason money on paper, as the market signalled that was more likely to happen.
The spread between the two classes of shares shrank sharply. The voting shares were worth $1.62 more than the non-voting shares as of Tuesday's close. In late morning trading Wednesday, the spread declined to $1.12.
But those are only paper declines for Mason, and the head of the hedge fund maintains he can wait this out as long as he needs to. That is, of course, assuming that Telus can't ram through its plan in the shareholder vote set for October.
Absent a decisive win at a shareholder meeting, this feels set to go on for a very long time, with both sides seemingly confident they can wear down and out wait the other side.
Telus is sending messages to the market that it believes Mason is slowly bleeding money on its investment in Telus, which includes not only a large long position of close to 20 per cent of Telus voting shares, but also a short position of similar size, largely in non-voting shares.
Michael Martino, the head of Mason, denies that, saying he can sit on this trade for as long as it takes Telus to give in, or for someone to come along and buy the shares he owns at an attractive price.
An open-ended option
The cost of the position is "not a problem," he said in an interview in Toronto Tuesday. Mason didn't borrow money to buy the stock, instead getting its funding from investors such as pension funds and endowments, he said. In fact, he argued, the firm is not even fully invested so there is no need to free up any money tied up in Telus anytime soon.
His stance is that the Telus position is an open-ended option on someday someone paying a big premium for the voting shares, either in a conversion or other transaction. And there's no expiry date on the option, making it more valuable, theoretically.
The question is what drives that option into the money.
Mason has hired Blackstone to explore the alternatives. In addition, by Mr. Martino's own admission, there are "a lot of bankers running around" from other firms pitching ideas. (One idea making the rounds is that Mason could sell its stock in a block to an investment bank, at a discount, with Telus covering the shortfall in return for an agreement from Mason to stay away from Telus stock for many years.) Mason could hope for a takeover of Telus as a whole, but given the realities of limits on foreign ownership, competition concerns in Canada, and the sheer size of Telus at a time when mega-deals are few and far between, and the odds don't seem great right now.
Mason could also convince someone that its 20 per cent stake is worth a lot as a toehold in Telus or as a way to exert corporate control. That was one of the reasons Blackstone was brought in.
Boxed in?
One path "could be a sale," Mr. Martino said. "Obviously, it would be at a significant premium to where the stock is now. Again, people aren't thinking more broadly."
He suggested that "there are Canadians firms that we are speaking to that have backing of large amounts of capital. So that should be a concern for any board." He also said that a couple of large investors could work to remove Telus's anti-takeover defence, which takes the form of a shareholder rights plan, to put the company in play.
Mr. Martino clearly wants to send signals that he is in no way boxed in.
But the perception is that the the 20 per cent does not have a clear path to control. In addition, a view among some that Mason is stuck means that many investors would be inclined to bid on his Telus stock only at a discount, based on conversations with bankers and large institutional investors.
And selling the long position is only part of the problem. Mason has to find a way to close out a very large short position without causing a short squeeze that drives up the price of the shares it needs to buy.
Mr. Martino does not seem deterred.
"Control of a large public company in a great country, in an oligopolistic market is an extremely valuable thing," he said. "And if you were in that position, you could think of a lot of ways to make money."
This post contains reporting from Globe and Mail reporter Rita Trichur.