Business

It’s not a case of ‘Brascan Go Home’—but that may be the result

RICHARD STARKS September 20 1976
Business

It’s not a case of ‘Brascan Go Home’—but that may be the result

RICHARD STARKS September 20 1976

It’s not a case of ‘Brascan Go Home’—but that may be the result

Business

“Liquidate.” The iconoclastic Montrealbased stockbroker’s confidential recommendation to his institutional clients earlier this year was harsh but to the point. Although Brascan Ltd. shares are trading on the Toronto Stock Exchange at only $10, and paying a one-dollar dividend, the company has problems at home and abroad.

Brascan, with assets of $2.25 billion, is the sixth largest industrial corporation in Canada. It has in the past employed numerous becalmed Liberal politicians such as Mitchell Sharp and the late Robert Winters. Yet it’s almost unknown here, except vicariously through its foamy commercials for Labatt’s beer: John Labatt & Co. is just one of Brascan’s 29 subsidiaries or holdings. It’s a genuine Canadian-grown multinational. The bulk of its assets are in resource exploitation and public utilities, exactly the areas Canadian nationalists would argue should be controlled by Canadians—but these are in Brazil. In 1912, as Brazilian Traction, Light and Power Co., the company won the franchise to provide power to Sao Paulo and Rio de Janeiro. It’s been there ever since, and by 1950 was running many of Brazil’s essential services: telephones, electricity, gas, transportation and water. Since then, it has retreated from many of these holdings, and now its major interest by far, 13% of its entire assets, is an electrical utility, LightServicos de Electricidade S.A., the largest private company in Brazil, bigger than either Ontario Hydro or Consolidated Edison. Brascan has gone to considerable

lengths to Brazilianize its major holding. The rumor is that when Brascan sought to purchase land in the state of Bahia, it sent two of its executives to scout out the property from the anonymity of a vw bug. Few Brazilians are aware that Light is foreignowned. But the government knows.

The Brazilian Army, which seized control of the country in a bloodless coup in 1964, intervenes in the economy more systematically than perhaps any government outside the Communist bloc. Light is a tightly regulated monopoly, which has been allowed a generous return on its investment. But last year the government unilaterally altered the ground rules to reduce the rate base on which the earnings of Light are calculated. That, plus heavy increases in costs and taxes and a resurfacing of Brazil’s old problem of hyperinflation all ganged up to cut Light’s earnings for the first time in as many years as anyone cares to remember. The military government nationalized Brascan’s telephone operation in 1966, and although Brazil’s political and economic climate is not likely to grow stormier in the immediate future the company is pursuing a hurried diversification program, like a giant octopus struggling for a hold on any available rock. The Brazilian government welcomes foreign capital coming into the country, but it does its utmost to prevent that capital leaving-including the $96 million Brascan will receive for its telephone operations. And the rapidly escalating withholding tax structure ensures that 66% of Light’s earnings must also remain in Brazil. Trapped,

Brascan’s money has been herded by government tax incentives into investments, from meat packing to consumer credit, about as related as a fistful of licorice all sorts. Last year, they turned in a collective loss of close to $16 million.

In Canada, unable to draw on its Brazilian assets and forced to the expensive Euromarket for initial investment capital, Brascan’s diversification has been slow and troubled. It now has interests in Great Lakes Power Corp. Ltd. (with nine hydroelectric plants); 26% of Canadian Cablesystems (cable TV and movie theatres) ; and Triarch (merchant banking). Last year, an attempt to get control of Ashland Oil Canada was rudely rebuffed by Ashland’s U.S. parent; a 15% holding in Elf Oil culminated in a $20 million write-off. This year, a take-over of Western Decalta Petroleum aborted; another $10 million was written off when Brascan declined to take up its option to buy control of the Sukunka coking coal project in British Columbia. And Brascan’s international trading arm failed to make money and had to be sold. Brascan paid its usual dividend this year, but canceled a 10% stock dividend, blaming the Anti-Inflation Board, to less-than-universal acceptance.

Brascan’s diversification began under Jake Moore, a solid establishment figure who became something of a folk hero when he helped repatriate Labatt’s in 1967. In March, he became chairman, and was succeeded in the presidency by another ex-accountant, Edward C. FreemanAttwood, who, understandably, quietly defends management against charges of confusion and mistakes. There has recently been a recovery of earnings, he says; Light has had a rate increase; the other operations in Brazil and Canada are surfacing at last. Even Elf could have a silver lining: it left Brascan with an interest in Beaufort Sea acreage where Dome Petroleum Ltd. is committed to drill for oil. Meanwhile, although he still spends the bulk of his time in Brazil, and only last spring made his first trip west to Vancouver, Freeman-Attwood is planning a period of reassessment to “tidy up” Brascan’s resource investments in Canada before breaking fresh ground. Brascan recently became a constrained corporation—a legal way of locking in Canadian control thus confirming its eligibility for investment areas from which Ottawa excludes foreigners. It is slowly coming home. “We are aware of the criticism,” Freeman-Attwood says, “but it’s up to us to show we can do better rather than bow our heads.”

RICHARD STARKS

M $2*247 Brascan Investments Brascan Investments In Canada $293 in Brazil $1.954 13% of total 87% of total Utility $62 Utility $1,638 100% of Great Lakes Power Company 83% of Light-Serviços de Electricidade Limited SA Consumer Goods and Servlces$71 Consumer and Industrial Goods 31% of John Labatt Limited and Services $49 7% of Hudson s Bay Company 26% of Canadian Cablesystems Limited Natural Resources $106 Natural Resources $3 25% of Austen & Butta Limited 100% of Brascan's Resources Limited 15% of Elf Oil Exploration and Production Canada Ltd 12% of Magnorth Petroleum Ltd 100% of Coalition Mining Limited 40% of Western Mines Limited Financial Services $10 Financial Services $182 100% of Triarch Corporation Limited 28% of Commerce Capital Corporation Limited Other $44 Tourism and Real Estate $26 General corporate assets Other $56 figures are stated in millions of U.S. dollars/all Information from 1975 Annual Report