Two of the three largest shareholders of MI Developments Inc. blasted Frank Stronach's plan to reorganize his non-automotive holdings, meaning the plan could be dead in the water just days after it was unveiled.
Hotchkis and Wiley Capital Management and Greenlight Capital Inc. are opposed to the deal, which involves selling MI Developments' stake in racetrack and gambling company Magna Entertainment Corp. (MEC) to Mr. Stronach for $25-million (U.S.) and creating a new real estate company.
The two investment firms each hold more than 10 per cent of the subordinated voting shares of MI Developments, which gives them enough shares to block the deal on their own. The deal can not be completed if dissent rights are exercised by more than 10 per cent of the class A shares. Dissent rights permit investors to ask the courts to change the terms of an acquisition or buyout.
If either Hotchkis and Wiley or Greenlight exercises those rights, that condition will not be met.
The complex, three-way deal involves MI Developments transferring $150-million in cash, $247-million worth of loans still due from MEC and real estate in Aurora, Ont., worth an estimated $50-million to a new company controlled by Mr. Stronach. He would own 10 per cent of the new real estate company, as would Magna International Inc., the auto parts company of which he is chairman. Existing shareholders of MI Developments would own 80 per cent of the new company.
"We do not understand how this deal can be justified," said David Green, a principal and portfolio manager of Hotchkis and Wiley. The firm said in a year-end Securities and Exchange Commission filing that it held 11.9 per cent of MI Developments class A shares.
"The structural elements make sense; they are almost identical to the deal the shareholders overwhelmingly supported and the board rejected in 2005," Mr. Green said in a statement Wednesday. "But the transfer of approximately $300-million, greater than 20 per cent of the stock's current market cap, to Frank Stronach in order for him to now support the deal is appalling. We strongly object to this transaction in its current form and intend to vote our shares against it."
Greenlight, which holds 10.8 per cent of the real estate company's shares, issued a 21/2-page news release denouncing the deal and calling on the MI Developments board of directors to take action.
"Rather than engage in a value-destroying transaction, the board can and should simply implement the steps that create value on its own," Greenlight said.
"If it were inclined to do the right thing, the board could return [MI's] excess capital to shareholders, increase annual distributions and dispose of MEC without a shareholder vote and even over Mr. Stronach's objection."
MI said later it rejects the "mischaracterizations contained in the Greenlight press release concerning the manner in which MID has conducted its affairs" and said public shareholders will have the right to vote on whether the proposal proceeds.
Greenlight has already demonstrated an enthusiasm for battling Mr. Stronach. The hedge fund was a key player in a 2004 shareholder revolt that led to MI Developments cancelling a plan to buy back all of MEC and take it private.
Mr. Stronach and MI Developments won a Greenlight-initiated lawsuit that sought to force the real estate company to divest the MEC stake.
Greenlight has appealed that decision.
Several large shareholders have lined up in support of the deal, Mr. Stronach said in filings with securities regulators Wednesday.
Among them are Mackenzie Financial Corp., which owns 19.8 per cent of the subordinate voting shares, as well as Donald Smith & Co. Inc., with 10.2 per cent, and Farallon Capital Management LLC with 7.3 per cent.
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