Telus Corporation (TSE: T) is the third player in Canada’s telecommunications oligopoly, providing a variety of internet, traditional phone and mobile services. The company has a dual class share structure, with both voting and non-voting shares. As expected, the voting shares have traditionally garnered a slight premium. Then the company made this announcement in late February:
TELUS Corporation (NYSE:TU) today announced that it is proposing to convert its Non-Voting Shares into Voting Shares. Through this proposal, TELUS will give shareholders the opportunity to decide whether to eliminate the Corporation’s dual class share structure at TELUS’ upcoming annual and special meeting of shareholders to be held on May 9, 2012. Under the terms of TELUS’ proposal, each Non-Voting Share would be converted into a Common Share on a one for one basis if approved by two-thirds of the votes cast by the holders of Common Shares and two-thirds of the votes cast by the holders of Non-Voting Shares, each voting separately as a class.The interesting point here is that, despite the premium price of voting shares, the company decided that a 1:1 conversion ratio would be fair. This created an arbitrage opportunity:
The non-voting shares have generally traded at a discount of about 5 per cent, or an average of about $2.50 a share, to Telus voting shares. So the 1:1 ratio was a bit of a gift to owners of non-voting stock.
The standard play for a hedge fund in such a situation was to buy non-voting stock, go short the voting shares, and sit back. When the conversion was completed, you would be given voting stock in return for your non-voting stock. You could close out the short position, and be up $2.50.
Arbitrage opportunities don’t last long, and pretty quickly after the consolidation plans were announced, the traditional pricing gap between the voting and non-voting shares contracted as investors shorted the voting shares and went long the non-voting shares.
Then, in recent weeks, the gap began to once again expand. It turns out that not everyone was happy with the 1:1 ratio and pressure began to mount for the deal terms to be changed. Some investors began shorting the non-voting shares, believing that the ultimate conversion ratio would have to change to reflect the historical premium paid by investors in the voting shares. One of these investors, Mason Capital, announced that it would vote against the conversion:
Mason said in a filing today that it has accumulated almost 19 per cent of Telus’s voting shares, and plans to vote against Telus’s proposal to convert its non-voting shares into voting shares at a 1:1 ratio.The next steps will be a mad rush until May 9th by each side to shore up support for their positions. Since the vote requires 2/3 approval by each class of shareholders separately, and Mason owns almost 19% of the voting shares, Telus has its work cut out for it. Given that Mason has about $1.2 billion riding on the short side of its bet, my guess is they already have the support they need.
If Mason and others could buy enough voting shares to create the threat of stopping Telus’s plan when it came to a shareholder vote, while shorting the non-voting stock, the gap between the stock classes would more than likely widen out again (and it has been doing so). Mason would make money as the gap widened.
It’s clear Mason has been shorting non-voting shares. The fund manager said in its filing that it had shorted at least 21.6 million non-voting shares, but had gotten requests from the people who lent the stock to return it.
A lot of the comments circulating online about this are unfavorable to Mason, but I think Mason’s point here is legitimate. An investor paying a premium for voting rights should never have to see others get the same right for free. I am also unconvinced by the company’s explanation for the need for this conversion, which has been variously described as such:
“Combining the shares together into one class means there’s more liquidity, a deeper trading pool to the benefit of all shareholders,” McFarlane [CFO of Telus] said.
Darren Entwistle, president and CEO, said: “This proposed share conversion is responsive to shareholder feedback, resulting in enhanced trading liquidity and the extension of voting rights to all TELUS shareholders. Notwithstanding the fact that both classes of shares are entitled to the same dividend, are widely held and have similar liquidity, our Non-Voting Shares have historically traded at a discount to our Common Shares. The approval of this proposal will eliminate this price discount. TELUS believes the proposed simplification of our share structure to a single class is beneficial and fair to all shareholders, and consistent with good corporate governance.”What the CEO fails to mention is that the discount will be eliminated at the expense of those who paid for it up front. There’s no such thing as a free lunch and the combination of two share classes does not magically create sustained shareholder value.
What do you think of this?
Author Disclosure: None