BUSINESS

Telus CEO tears strip off hedge fund and will still pursue one class of shares

05/09/2012 02:43 EDT | Updated 07/09/2012 05:12 EDT
Telus will quietly pursue a single-class share structure to prevent another investor from scuttling the plan, the telecom company said Wednesday as its chief executive lambasted a U.S. hedge fund he said was responsible for the failure of its latest attempt.

CEO and president Darren Entwistle accused New York-based Mason Capital Management of manipulating the market for short-term financial gain with a practice called "empty voting" hours after the telecom company withdrew its share consolidation plan, saying it was unlikely to succeed.

"Empty voting is a troubling and disgraceful practice that gives a hedge fund considerably more votes than its economic interests warrant," Entwistle said Wednesday via webcast from the company's annual meeting in Edmonton.

The Vancouver-based telecom company withdrew its proposal to have a single class of common shares early Wednesday before a shareholders' vote after acknowledging the U.S. hedge fund would have defeated the plan. The plan needed the approval of two-thirds of votes cast by each class of shareholder and a low proxy voter turnout would have favoured Mason Capital.

Mason Capital owns nearly one-fifth of Telus' voting stock, but has also disclosed that it is short selling the company's non-voting shares. Short sellers make a profit when the stock price falls.

Chief financial officer Robert McFarlane said Telus will come back with a similar proposal to convert the non-voting shares into voting shares on a one-to-one basis.

"But the exact details of how and when we might do that —that's for us to know and others to speculate on," McFarlane said after the meeting.

"Given the lessons of this experience, we want to keep our intentions close to our breast for now."

Telus said Mason Capital only took an ownership position in Telus after the company announced in late February it planned to convert non-voting shares into common voting shares.

Mason owns 33 million voting shares, or 19 per cent, and shorted almost the same amount in non-voting shares, essentially betting the price of those shares will fall if the share consolidation plan was defeated.

It is a legal trading strategy in Canada based on the traditional gap in prices between the voting and less desirable non-voting shares.

"In this case, Mason Capital was voting $1.9 billion worth of Telus' common shares with only a $25 million net economic stake," Entwistle told shareholders.

The failure of Telus' share conversion plan is expected to be widely studied. B.C. regulators have already said they are looking into the practice of empty voting.

"It's going to be studied in all of the law schools and beyond because of the results where Mason successfully blocked this proposal — despite 92.4 per cent of the non-Mason shareholders voting for the proposal — is unbelievable," McFarlane said.

Telecom analyst Troy Crandall agreed what happened to Telus with empty voting will be studied.

"It will go down in textbooks as a case study because it's a very unique situation," said Crandall of MacDougall, MacDougall & MacTier, adding that Mason Capital will also make money if it unwinds its position in Telus.

"This was a very solid money making proposal, or arbitrage opportunity that was presented to them," he said. "It allowed them to basically take a long and a short position with virtually no money down."

If Telus remains committed to its one-to-one conversion plan, the company could be faced with hedge funds repeating the tactic.

"Now that everybody knows the trick, it will happen quicker and it will probably be more extreme. Everyone knows the little trick now that Mason had done," Crandall said.

Telus employees collectively own 8.2 million common shares and, as the company's largest owner of voting shares, were disadvantaged by what Mason did because they approved of the conversion, he said.

"They're certainly not here for the long haul, unlike our team members and our true committed long-term shareholders," Entwistle said.

However, Mason Capital thanked shareholders who voted against the proposal and said there's no reason to think it won't be a long-term shareholder in Telus.

"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," the hedge fund said in a statement.

"Genuinely good governance respects the rights and powers of all shareholders as defined by the articles of the company. There is no reason to assume that Mason Capital will not be a long-term shareholder of Telus."

Also on Wednesday, Telus posted a six per cent increase in net profit to $348 million or $1.07 in earnings per share in its first quarter. That compared with a net profit of $328 million or $1.01 per share in the same quarter in 2011.

Revenue was up four per cent to $2.6 billion from $2.5 billion in the same quarter last year, driven by its wireless and TV services.

Analysts' estimates compiled by Thomson Reuters pegged revenue at $2.65 billion in its first quarter. Earnings per share was estimated at $1.04.

Telus had 63,000 postpaid net subscribers, customers generally on lucrative three-year smartphone contracts, in the quarter. That compares with 62,576 net postpaid subscribers for BCE Inc. (TSX:BCE) and 47,000 for Rogers Communications Inc. (TSX:RCI.B).

Shares in Telus were down three cents to $58.13 on the Toronto Stock Exchange while non-voting shares were down 85 cents to $56.15 on the NYSE.