The question was posed in a tone of genuine puzzlement. “Why,” an unidentified middle-aged man asked the executives at the Hees International Bancorp Inc. annual meeting in Toronto earlier this month, “is the investment community so down on Hees?” Added the worriedsounding investor: “I get nervous when I see large investors staying away.” In fact, investors both large and small have been staying away from Hees lately. Their aversion has forced down the financial holding company’s stock price to a low last week of $14.25 per share. Hees has seen its shares lose their value twice as fast as the average among other holding companies that have also been battered by lingering recession, lower profits and slow growth. But Hees president Willard L’Heureux offered the wondering investor little enlightenment. Saying that he was unable to explain the market’s judgments, the stocky lawyer expressed confidence that Hees’s share price would recover when the economy picks up. He did not mention the explanation most often heard elsewhere in the investment community: the impact that the severe financial problems of the Reichmann family’s Olympia & York Developments Ltd. (O&Y) are having on the corporate empire of Edward and Peter Bronfman, Hees’s largest shareholder.
Indeed, the Bronfmans’ sprawling corporate empire, known as the Edper Group after its central holding company, Edper Enterprises Ltd., has been under pressure for more than two years. Edper’s reach takes in Canada’s three largest publicly traded real estate companies; its second-largest trust company, Royal Trustco Ltd.; John Labatt Ltd., the country’s second-largest food and beverage company, as well as the giant resource conglomerate Noranda Inc. In all, the brothers’ fortune is estimated to total $5 billion.
Losses: And clearly, the reasons for Edper’s slide go beyond the Bronfmans’ associations with the Reichmanns. The recession has struck particularly hard at Edper’s natural-resource and real estate holdings. Loan losses in the United Kingdom and unexpected problems at a California-based savings-and-loan subsidiary of Royal Trust, meanwhile, have weakened the earnings of Trilon Financial Corp., the group’s financial services holding company. In addition, the complex web of cross-financing among the Bronfman companies is increasingly unpopular with some large investors, who have criticized the group for its treatment of other shareholders. Montreal investment manager Stephen Jarislowsky, for one, complained that Edper
“ran roughshod over minority shareholders” earlier this year when it elected its own slate to the board of Labatt. “They stacked the board,” declared Jarislowsky. “That does not inspire confidence.”
Another threat to Edper emerged last week when Moody’s bond rating service of New York City announced that it was not only reviewing its rating of the long-term debt issued by one of the group’s forest-product companies, MacMillan Bloedel Ltd. of Vancouver, but placing the debt of a second Bronfman unit, Toronto-based Noranda Aluminum, on credit alert.
Still, the Reichmanns’ problems have had an impact on Edper. The two families have done business together for more than a decade: the Reichmanns own an interest in Edper’s real estate holding company, they have done various deals together in the past and O&Y representatives sit on the boards of some Edper companies.
They also share the same lead banker: the Canadian Imperial Bank of Commerce.
And the threat to the commercial real estate market posed by an O&Y collapse has investors warily trying to decide who the recession’s next victim might be. Declared Brad Smith, a financial analyst with Nesbitt Thomson Inc. of Toronto: “A fear factor is at work here, fear of the unknown.”
Debts: What is known is that shares in Hees and several other companies controlled by the Bronfmans have fallen sharply since O&Y’s troubles surfaced. Since the beginning of March, just before O&Y’s financial difficulties became apparent, Hees stock has lost 22 per cent of its value. The Toronto Stock Exchange’s financial management index, which tracks the performance of companies like Hees, also fell, but only by 10.4 per cent. Some other Edper units have fared almost as badly.
Edper’s extensive real estate holdings have
been the hardest hit. Bramalea Ltd., a Torontobased real estate company with interests in commercial and residential real estate across the country, had already suffered badly as a result of the recession. Even before O&Y’s problems became apparent, Bramalea’s shares had fallen to $4.30 from a high of $22.75 in 1990, and since early March they have lost another 50 per cent of their value. To reduce its massive debts, the company is trying to sell one-quarter to one-third of its real estate holdings within the next year or two. But investors openly worry that if creditors force O&Y to sell a substantial portion of its prized commercial real estate at distress prices, that would depress real estate values even more, adding to Bramalea’s financial problems.
As well, there is worry that the Bronfman group’s notoriously complex financings may have exposed it to even more O&Y-related risk than is publicly known. Peter Bronfman THE plays down that possibility, saying that his companies have been more cautious than the Reichmanns’. Said Bronfman: “They have been willing to take much bigger risks.
I think we are much more risk-averse.” Indeed, Trilon president Kenneth Clarke was clearly relieved in late April when O&Y sold most of the 9.5-per-cent stake that it had held in Edper’s Trilon Financial Corp. Noting that O&Y’s holding had been “overhanging [Trilon’s] stock price,” Clarke expressed hope at the time that its withdrawal would reassure investors. In fact, O&Y’s departure did not help: shareholders continued to be wary of the stock, and Trilon’s share price has since fallen to $8 from $9.25 before the sale.
Sons: Business links between the two families extend beyond their former joint position in Trilon.
Among other common interests, the Reichmanns also hold a 10-per-cent stake in Trizec, the Bronfmans’ real estate holding company. Royal Trust has loaned several million dollars to O&Y and holds preferred shares in some of the companies that O&Y controls. The connections even extend into the younger generations of the two families: Bruce Bronfman, Peter’s son, and Steven Reichmann, Ralph Reichmann’s son, both have an interest in a small telecommunications company.
But as much as anything,
some investors fear that other links, as yet undisclosed, may bind the Bronfmans even more closely to the Reichmanns’ fate. “No one seems to know the full extent of the relationship between them,” said one investment analyst, who commented on the condition that she not be identified. Indeed, although the Bronfmans’ holdings are largely public, analysts and institutional investors have frequently criticized their companies for being stingy with information. Edper has a “credibility problem,” said the same analyst, “and it is the last thing they need right now.”
The Bronfmans need credibility because they need cash. Like all major corporations, Edper companies rely on being able to raise capital to keep building and growing. In the current economy, with several of the group’s companies losing money and others not making
enough to pay dividends, Edper’s need for reliable sources of cash is even more acute.
However, there is a basis for the optimism that L’Heureux attempted to instil in Hees’s restless shareholders. He pointed out that the economy shows some early signs of a recovery. As well, the combination of lower interest rates, a lower dollar and increases in some commodity prices point to an improvement in natural-resource earnings. And Royal Trust managed to report a modest turnaround in the first quarter of 1992.
Some of Edper’s other holdings, meanwhile, have held up reasonably well during the recession. London Life Insurance Group Inc. reported record profits last year. Labatt, with its interests in the relatively resilient beer, food and entertainment markets, reported a $ 109-million profit on revenues of $5.4 billion in 1991.
Retreat: Still, even the bright spots are not free from problems. Analysts say that Royal Trust has proportionately more troubled loans on its books than its main competitors. Edper’s Noranda Forests was forced earlier this year to retreat from an attempt to raise the price of its newsprint. And although Labatt is cash-rich, Edper’s control of the company rests on only 38 per cent of its shares—institutional and individual investors own the remaining 62 per cent. Peter de Auer, director of the Ontario Hydro pension fund, which owns Labatt shares, says that he would be unhappy if Edper tried to follow its common practice of moving money around the empire by trading preferred shares in one company for cash from another. Said de Auer: “Flowing money from one part of the empire to another is probably not as easy as it used to be.”
As for the new scrutiny being directed at the Edper group of companies, de Auer added: “They could do pretty well anything in a bull market because everybody was making money. But in a bear market, people take any excuse to sell securities. Companies come under a microscope.” Indeed, L’Heureux and other Bronfman executives, who have never relished being in the spotlight of public attention, can expect to face more, not less, examination in the months ahead.
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