The price is insanely high, but Magna International shareholders should swallow hard and pay the $863-million (U.S.) needed to get founder Frank Stronach's hands off the wheel at the auto parts company.
Mr. Stronach announced a deal on Thursday that many thought would never come - the 78-year old is willing to cede control of the auto parts company by giving up a dual share structure and killing a personal services contract that doled out millions of dollars each year.
The status quo is an affront to shareholder democracy, and weighs heavy on Magna's valuation. Despite strong long-term performance, many institutions won't come near this stock, and Magna's multiples lag peers. Get rid of the dual class structure, and this stock should rally.
But my oh my, is Mr. Stronach taking advantage of his last kick at the can.
The Stronach family trust - the founder has two children - will receive $300-million in cash and 9 million Magna common shares in return for giving up its multiple voting stock, which holds 66 per cent of the votes.
Contrast this to the path followed by entrepreneur Miles Nadal at MDC Partners - he quietly gave up a dual share structure in the marketing company in 2004 without getting special treatment.
So why should shareholders give one last extravagant gift to Mr. Stronach?
They would be putting their long-term interests ahead of any knee-jerk reaction to the short-term wealth creation coming to the Stronach household.
According to Magna sources, if the company can move the industry average for an auto parts company's multiple on EBITDA (earnings before interest, taxes, depreciation and amortization), then Magna's stock price soars by about 30 per cent.
If the auto parts company sees the mutiple of its enterprise value to EBITDA rise by just 0.4x of EBITDA, the deal would be neutral to Magna's share price.
And let's be realistic here. Mr. Stronach holds all the cards. He can live with the status quo. If investors do really want this company to move to one share, one vote, then they will have to hold their noses, and pay the founder.
Andrew Willis