Mason Capital Management has armed itself with some 20 per cent of Telus voting shares and observers say the New York-based fund could gather enough shareholder support to derail the plan.
Telus says a single class will provide better liquidity while Mason argues that — as a voting shareholder — it would get shortchanged because voting shares have historically been worth more than non-voting shares.
Whether shareholders have aligned themselves with Telus or Mason will only be known after votes are cast Wednesday at the company's annual general meeting in Edmonton.
"I think there are other hedge funds that have also taken a position, but they just haven't said a peep," said telecom analyst Troy Crandall of MacDougall, MacDougall & MacTier.
The plan would allow shareholders to exchange Telus' non-voting shares with voting shares on a one-to-one basis.
Telus accuses Mason of trying to defeat the proposal for its own short-term profit.
Non-voting shares tend to trade at a discount to common shares, but after Telus disclosed its plan, both classes of stock started to align with each other in anticipation of the arrangement being a success.
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 is defeated. Short sellers make a profit when the stock price falls.
Crandall says it's not surprising that a hedge fund would take a short position.
"They've put a tasty piece of steak in front of a bunch of lions and then asked them not to go after the steak," Crandall said of Telus' one-to-one conversion plan.
If shareholders don't pass the proposal, Telus (TSX:T) may have to consider a premium for its voting shareholders rather than a one-to-one conversion rate, he added.
"It's clear there is a value to having a vote."
Telus chief financial officer Robert McFarlane pointed to the alignment of the share prices as evidence of the "market's view of the positive effect benefiting both classes of shares."
Telus said non-voting shares holders get the same dividend as voting shareholders and also notes non-voting shareholders have coattail rights, which means in the event of a change in ownership they would get the same premium as voting shareholders.
Michael Martino, a principal and co-founder at Mason, argues the "transaction doesn't create any value."
"It doesn't sell one more cellphone contract. It doesn't get one more business customer signed up. It doesn't save one dollar of expense," he said.
"It's just about how the pie is going to be divided up."
Martino said his firm will get shortchanged if there is just one class of common shares because the voting shares have had a four to five per cent premium over the non-voting shares.
"The transaction attempts to take that value without compensating us, all the voting shareholders," Martino said.
Mason Capital is open to negotiation with Telus for some kind of compensation, Martino added, but he didn't elaborate. He wouldn't say if his firm will attend the shareholders meeting or what their strategy will be.
Beutel Goodman & Co. Ltd. holds eight million voting shares and about one million non-voting shares and indicated it will vote in favour of the one-to-one conversion plan.
"It's going to increase the liquidity of the company, it's going to simplify the capital structure," said James Black, vice-president of Canadian equities.
"It's a shareholder friendly move so we're definitely voting in favour of it."
Telus' non-voting shares are listed only on the New York Stock Exchange and the telecom company said a single class of common shares would be listed on the NYSE and on the Toronto Stock Exchange.
Shares in Telus were down 22 cents to $58.20 on the Toronto Stock Exchange, while non-voting shares in Telus were down 55 cents to $57.14 on the New York Stock Exchange.