Beware the Canadian corporate champion

Bingeworthy shows include heroes, villains and melodrama, mixing intrigue, surprising twists and the occasional cliff-hanger. Under this formula, the Canadian market is often mandatory viewing.

Rogers Communications recently concluded a two-year slow-motion takeover of rival Shaw Communications, featuring billionaires, political wrangling, quasi-court battles, side deals, alleged backroom agreements and a subplot of family infighting in the boardroom.

Next up is home-grown Teck Resources, controlled by mining scion Norman B. Keevil and currently fending off entreaties from foreign powerhouse Glencore. This drama opened with Teck proposing to break itself up. Having recently sold its oilsands assets, the company aimed to separate its remaining metals mining business from its steel-making coal assets. It believed the market was discounting the value of the company in its combined form, which made it less appealing to any particular investor set.

Teck proposed spinning off the coal assets to allow the metals business to trade on its own with a higher-growth, more ESG-friendly investment profile. But it wasn’t a clean split, with the coal business still owing 90% of its cash flows to Teck for the next decade or so. Nevertheless, Teck management was confident they would succeed in convincing two-thirds of Class B subordinate shareholders to back the deal.

Seeing Teck in play, Glencore offered to purchase the company as a whole. Teck management didn’t take well to the intrusion and rebuffed Glencore outright, with Keevil stating that “Canada is not for sale.” It was at this point that everyday investors started to realize that perhaps their interests weren’t entirely aligned with those of the controlling shareholder.

The spin-off proposal came down to the wire and was withdrawn at the last moment by Teck management when it became clear they didn’t have the votes to win. It was later revealed that Teck failed to gain support from its largest Class B shareholder, China Investment Corp, which likely has its own state-sponsored interests at play and kept Teck in the dark until the final hours.

As of this writing, Teck has pivoted and is in the throes of a strategic review regarding the future of its coal business. It has at least one proposal on the table from Glencore for the entire business, and another potential offer (for at least part of the business) from a consortium headed by Canadian mining magnate Pierre Lassonde (who has also stated Canadian companies shouldn’t be sold to foreigners).

The problem for the non-billionaire crowd is that it’s tough to take patriotism to the bank. The so-called “hollowing-out” narrative is well known after previous Canadian mining giants Inco, Alcan and Falconbridge were sold to foreign (and mostly friendly) interests, but the risk today is overstated. For every sellout, there’s a Canadian international success story like Couche-Tard or WSP Global, or a Canadian cautionary tale like Nortel or Blackberry.

The Canadian champion approach to investing makes little intuitive sense and seems more like romanticized grandstanding. In addition to being pushed by founding shareholders, the cause is often taken up by politicians waffling between genuine resource security concerns and populist pandering over head office job losses. By contrast, everyday investors should look to sell to the highest bidder, and the market understands that the more bidders, the better the price.

Getting a healthy dose of a company founder’s personal beliefs, whether patriotic or ESG-related, can reflect the downside of being a minority shareholder in Canada. Advisors would do better to wait for a solid opportunity and cash out, leaving behind any histrionic back and forth.

For Teck in particular, there doesn’t appear to be a big payoff on the horizon. Teck structured the original spin-off so it could access steady cash flows to build out the metals business over time. An outright sale of the coal assets could lower the strategic value of those proceeds.

The market has seemed to understand the limited potential from the start — the share price has barely moved during this saga. The takeaway is that it’s never a good idea to invest solely with a transactional catalyst in mind. To own Teck in this environment, advisors should look past the current narrative and focus on the long-term potential of the metals business, rather than the latest Canadian dramatic turn.

Mark Rosen, CFA, MBA, CFE, heads ARC Research, providing independent equity research to investment advisors across Canada

Mark Rosen

Investments

Mark Rosen, CFA, MBA, CFE, heads ARC Research, providing independent equity research to investment advisors across Canada.