Bay Street’s cozy club of investment dealers, already agonizing about the Toronto Dominion Bank’s cut-rate brokerage service, is about to feel the earth move. Details remain obscured in secrecy, but an international investment bank with a capital base nearly twice the size of Wood Gundy or Dominion Securities Ames—the industry leaders—is in the process of being incorporated. Gordon Capital Corp., a new private venture, will have initial equity of about $100 million, compared to Wood Gundy’s current capitalization of $54 million. It will inaugurate a new style of underwriting which will discount by 50 per cent the rates charged by the syndicates of traditional “banking groups” that have dominated Canadian finance since the building of the CPR. The new development will not affect the small investor because the new group will limit its business to institutional customers. What Gordon Capital’s founders have set out to do is circumvent existing regulations, through entirely legal means, to create Canada’s largest investment house. The effect of their audacious move will be to alter totally the way corporate money is raised in Canada.
At the same time, if Gordon Capital’s proposals are approved by the industry’s regulatory agencies, it plans to introduce an impressive international dimension to Canadian financing through its partnership with Groupe Bruxelles Lambert, Belgium’s secondlargest holding company. Part of a megaconglomerate whose holdings include Radio Luxembourg, the largest commercial broadcast house in Europe, Bruxelles Lambert’s ownership is split among Paul Desmarais, chairman of the Montreal-based holding company Power Corp., Baron Léon Lambert, Belgium’s leading venture capitalist, Anders Wall, chairman of Volvo, and Albert Frère, the Walloon steel czar.
This week the Ontario Securities Commission (OSC), directors of the Investment Dealers Association and governors of the Toronto Stock Exchange are evaluating the Gordon Capital proposals. According to an industry insider, the initial reaction of the three organizations was stunned realization that, as revolutionary as Gordon Capital’s plans may be, they probably fall within the letter (if not entirely the spirit) of existing regulations—and
that there is no way to defuse the threat to existing structures. That will probably hold true even though the new company, for the first time in any Canadian investment house, will split its functions as a raiser of capital (which falls outside most of the OSC regulations) and as a distributor of securities (which remain closely regulated).
The new venture is the brainchild of Neil Baker, a discreet investor who heads the relatively unknown Winnipeg Supply and Fuel Co., and Jim Connacher, a former Wood Gundy analyst who purchased a seat on the Toronto Stock Exchange for $65,000 in 1970. Each owns 20 per cent of Toronto-based Daly Gordon Securities, a low-profile bro-
kerage firm which last year accounted for an estimated 13 per cent of the total transactions on the Toronto Stock Exchange, topping all other contenders.
Connacher, who is a first cousin of Liberal leadership contender John Turner’s wife, Geills, has threatened to fire any member of his staff who gives reporters an interview. Baker, who started in business managing the investment portfolios of Peter and Edward Bronfman—the owners of an empire which includes Brascan, Labatt’s, Royal Trustco. and the Toronto Blue Jays—once bought for his own account about 10 per cent of Hiram Walker distilleries (a holding worth more than $80 million) and is one of the least-known but most astute big-money men in Canada. Both partners enjoy parading their ostentatiously anti-establishment cast of mind. Their new operation has its headquarters in the penthouse suite of Toronto’s TD Tower, formerly occupied by the bank’s Eskimo art collection.
Even before the current deal took shape, Connacher and Baker had built Gordon Securities into one of Canada’s most profitable brokerage firms, specializing in trading large blocks of shares; last year they absorbed the small but also highly lucrative R.A. Daly & Co. bond house. (During the first seven months of 1983 the combined companies traded $4.3 billion in stocks and bonds.)
At the same time, without anyone particularly noticing, Gordon Securities invaded the underwriting business, which manages the issuing of new shares and debentures, once the exclusive stalking ground of the old-line firms. Some of the most prestigious companies in Canada have abandoned their long-standing underwriting houses to take advantage of the Connacher-Baker panache. Gordon Securities was the lead underwriter for Bell Canada’s purchase of control in TransCanada PipeLines last December. “Bell has been the most conservative member of the old boys’ club,” Baker remarked to a friend at the time. “So, in terms of credibility, the fact that they asked us to handle the TransCanada issue—and that Wood Gundy and Dominion Securities worked for us on that one—was like the pontiff putting out his hands in blessing.”
If the proposed Gordon Capital Corp. clears the regulatory hurdles, Baker and Connacher plan to invade the underwriting field with rate-cutting on a grand scale. Because Gordon’s has such low overhead (120 employees to Wood Gundy’s 1,400), it will charge only about a two-per-cent commission fee on new underwriting, compared with the industry’s average of more than four. Instead of the usual turnaround of three months, the new firms would pay out the proceeds of new issues within a
week. That would be made possible by their intention to purchase all issued shares or bonds outright on their own account for later distribution to sales agents. (In 1982 Gordon Securities completed a debt financing of $75 million for Gulf Canada in five working days.) “We will price a deal on Friday afternoon and complete it on Monday morning,” Baker said recently. “We are determined to drive a wedge into the comfortable, take-your-time, let’s-havea-whole-new-bunch-of-meetings attitude of the cartel now handling
most new financing.” When Russ Harrison, chairman of the Canadian Imperial Bank of Commerce, looked at the Gordon Securities operations recently, he told the directors of Westmin, the oil and mining arm of the Toronto-based natural resource company Brascade, “There is no one left in the Canadian establishment who can afford to ignore the competitive flavor of these guys.” Another wrinkle Connacher and Baker eventually plan to introduce into Canadian finance is a variation of the “shelf registrations” available for some companies in the United States. According to the U.S. model, corporations
can keep on file the required financial data with the Securities & Exchange Commission and, when the moment seems right, they can launch a new issue with only a few hours notice. The key will be the unique format of the proposed Gordon Capital charter. The company will be incorporated specifically to carry out all aspects of investment banking that do not fall under registration requirements. That includes private placements (any issue sold in multiples of more than $97,000); managing underwritings; acquiring securities for their own account for sale through the registered sales forces of other investment houses; and mergers and acquisitions.
The most lucrative departure will be public offerings abroad. An internal Gordon Securities memorandum to staff outlining the firm’s international prospects states: “If the foreign dealer is careful not to engage in aspects of the trade in Canada, then it may participate in a distribution of Canadian securities without registration in Canada. This would typically be accomplished by a Canadian dealer acting as an underwriter on the prospectus (if any) and working in conjunction with a foreign dealer to assist in the distribution. It may also be accomplished without a Canadian registered dealer if the transaction takes place entirely abroad and if the participants are careful to prevent the securities from coming to rest in Canada.”
The Canadian firm’s formula for foreign participation in its ownership is probably the trickiest part of the whole deal. Because no foreign group can own more than 10 per cent of a registered Canadian brokerage house, Baker and Connacher have concocted a complicated formula which will allow their European partners to own a greater percentage of the firm’s activities that fall outside Canada’s regulatory agencies. That will smooth the way for the Groupe Bruxelles Lambert to put up $45 million of the required new capital while getting only a 10-per-cent voting interest in the new company.
The Brussels-based conglomerate made the headlines early in 1982 when its partners put together the consortium that spirited away the main assets of the Banque de Paris et des Pays-Bas just before President François Mitterrand’s nationalization of French banking assets. The Lambert group is in turn controlled by Pargesa, one of Switzerland’s largest holding companies. Established in the fall of 1981, Pargesa had attained assets of 5.9 billion Swiss francs by the end of 1983.
The full implication of Gordon Capital’s daring initiative has yet to hit. But Jim Connacher and Neil Baker are about to take on the old boys’ club. And it will never be the same again.
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