Taking Cadillac for a ride

James Fleming June 25 1984

Taking Cadillac for a ride

James Fleming June 25 1984

Taking Cadillac for a ride


James Fleming

When Olympia & York Developments Ltd. (O&Y), the $13.5-billion Toronto-based real estate empire of Paul and Albert Reichmann, opens a stock market buying campaign, rumors abound and share prices gyrate. Last week the Toronto and Montreal markets were beginning to recover from O&Y’s latest foray: a $180-million purchase of an 18-per-cent stake—13 million shares—in Cadillac Fairview Corp., a rival Toronto-based real estate giant. In an interview with Maclean’s, Paul Reichmann, the 52-year-old executive vice-president of O&Y, described the purchase as “an exceptionally good investment” because of Cadillac’s commercial assets and the “high calibre of its management.”

The investment in Cadillac was the latest in a series of moves by O&Y, one of the largest real estate developers in the world. Recently, O&Y has made an informal bid for Gulf Canada Ltd., a $4billion energy firm, and it has arranged the largest mortgage in North American history—worth nearly $1 billion —for three office buildings in Manhattan, where it is the city’s largest landlord. But the purchase of Cadillac shares attracted even greater interest

and gossip among investment analysts. O&Y now has major holdings in three of Canada’s largest public real estate developers: it already owns a 37.2-per-cent share in Trizec Corp. Ltd. of Calgary, and Trizec, in turn, holds a 31.1-per-cent interest in Bramalea Ltd. of Toronto. As well, the investment in Cadillac seems to pit the Reichmanns against the powerful Bronfman family. Cadillac’s major shareholder is Cemp Investments Ltd. of Montreal, a holding company that oversees the fortunes of Charles, Edgar, Minda and Phyllis Bronfman. Responding to a suggestion that O&Y’s new association with the Bronfmans might be a difficult one, Reichmann said, “I personally believe that it will be an excellent relationship.”

O&Y financed the purchase of Cadillac shares with cash on hand and existing lines of bank credit, and in a press release the company said that it would not rule out additional acquisitions of the stock. Still, Reichmann said that the shares were bought as an

investment, and O&Y did not have plans to seek control of Cadillac. Previously, Cadillac had not received any information about o&Y’s intentions and it only obtained a press release from its new shareholder detailing the purchases after phone calls to O&Y’s Toronto headquarters. Cadillac president Bernard Ghert said the firm was “flattered” that “knowledgeable real estate people such as the Reichmanns are prepared to make such a significant investment in the company.”

But according to Toronto real estate analyst Ira Gluskin, Cadillac was upset by the share purchase. Said Gluskin: “Cadillac Fairview and Cemp have just been completely outmanoeuvred by the Reichmanns.” According to Gluskin, the timing of O&Y’S acquisition was awkward for Cadillac, which had just made an offer to buy back from the public 15 million of its shares at $13.50. The stock was trading in the $ll-to-$12 range when Cadillac announced its offer. Two major banks, the Bank of Nova Scotia (BNS) and Toronto Dominion (TD) had told Cadillac earlier that they wanted to sell their holdings—about seven million shares. According to TD chairman Richard Thomson, his bank wanted to sell its shares at $13.50 each “to make a nice profit.” Cadillac decided to buy the seven million shares itself and it announced that it would buy another eight million shares at the same price from any shareholders who wanted to sell. As a result, the number of shares held publicly would be reduced,and Cemp’s 35-percent holding in the firm would automatically increase.

The Reichmanns pre-empted that strategy with their own $13.75-a-share offer. According to Harry Rannala, a real estate analyst with Merrill Lynch Canada, Cadillac’s already outstanding buyback offer made it possible for O&Y to start buying large blocks of stock without forcing the price up. Last week Reichmann confirmed that analysis. Normally, he said, O&Y could not acquire even five per cent of such a company “without driving the price of its shares to the sky.” Because O&Y obtained some of the available stock, only 9.5 million shares,

including the seven million tendered by the banks, were bought by Cadillac.

The Ontario Securities Commission (OSC) is now investigating, at Cadillac’s request, a flurry of trading in the firm’s stock before the Reichmanns made their bid and just prior to Cadillac’s own buyback announcement. The OSC wants to determine if the preannouncement purchases involved investors who had prior knowledge of the buy back. For his part, Reichmann said that O&Y was not involved in that surge of trading: “We have absolutely no knowledge of it.”

Ghert stressed that his company had met its main objective of purchasing the

shares held by BNS and the TD. There was also no doubt that Cemp and the Bronfmans remained firmly in control of Cadillac. In a separate development Charman Investments Inc., a company controlled by Charles Bronfman, announced at week’s end that it had bought five million Cadillac shares. As a result, the Bronfman interest in Cadillac was raised to 51 per cent. Securities regulators in Quebec and Ontario are now trying to find out what price Charman paid for those shares. If they determine that the shares were bought at an excessively high premium over the going market price and that the purchase can legally be called a takeover bid by Bronfman, then the financier could be ordered to make the same offer to all Cadillac shareholders through one of

his companies. However, few experts expected that anything would come of the informal investigation.

In the end, the Reichmanns emerged as the overall winners. They gained a major holding in a company that, said Gluskin, “is in the midst of a terrific turnaround.” During the recent recession Cadillac Fairview, like many other real estate developers, found itself saddled with a vast portfolio of residential properties. It also carried $1.6 billion in floating-rate debt. Cadillac has since sold $2.1 billion worth of assets, most of which were residential, and it has reduced its floatingrate debt to about $400

million. The company’s recovery has been so complete that for the fiscal year ended Feb. 29 it reported net profits of $31.8 million, up 150 per cent from the previous year. Ghert, who succeeded Senator Leo Kolber—the 55-year-old vice-chairman of Cemp—as chief executive officer of Cadillac in June, said that the company now has $1.6 billion in projects which have either just been completed or are under way.

Privately held O&Y usually keeps its financial position secret. But last year, to stop speculation that it was suffering because of poor demand for its roughly 50 million square feet of office space in Canada, the United States and Europe, Paul Reichmann and his 54-year-old brother Albert, who is president of the firm, disclosed key financial figures.

They showed that O&Y ended its 1983 fiscal year last July with a healthy $240million (U.S.) cash flow, a $40-million increase from the previous year. Gluskin estimated that O&Y’s net worth (its value after all debts are paid off) fell from about $3 billion (Cdn.) in 1981 to a low point of $1.7 billion during the 1982 recession. But it has since climbed to roughly $4 billion.

Not only do the Reichmanns hold large interests in their public real estate rivals but they have also expanded into the financial services industry. They own a substantial share of Trilon Financial Corp., a Toronto-based holding company set up by Edward and Peter Bronfman’s Brascan Ltd. The Reichmanns’ most controversial venture outside the real estate industry started in 1981, when they began expanding into resource companies. In March, 1981, when O&Y bought 93.2 per cent of Abitibi-Price Inc. of Toronto, the world’s largest producer of newsprint, about 87 per cent of the nearly $700 million paid for Abitibi, said Reichmann, was supplied by the Bank of Montreal. As well, O&Y owns 49.9 per cent of Brinco Ltd., a Vancouver-based mining operation, and nine per cent of Hiram Walker Resources Ltd., an energy and distilling concern. But O&Y bought into the resources companies when their share prices were at a peak, and, according to Terence Ortslan, a Montreal-based resource analyst, the company faces paper losses of “a few hundred million dollars.”

Still, the Reichmanns continue to be interested in additional investments in resource firms. Early this year, according to Paul Reichmann, O&Y made an informal offer to Pittsburgh-based Gulf Corp. to buy its more than 60-per-cent share of Gulf Canada Ltd. The $17.50-ashare offer, which would have been formally made through Abitibi-Price, was rejected as being too low. Gulf Corp. was bought in March by Standard Oil Co. of California (SOCAL), but Reichmann said that O&Y is still interested in buying Gulf Canada when its new U.S. parent puts it up for sale.

To replenish its war chest for future acquisitions, O&Y plans to complete a two-year effort to raise $3 billion in long-term debt by the end of this year. About half of that amount will be used to refinance existing debt, but the remainder, said Reichmann, will be invested in new projects. For the time being, the raid on Cadillac appears to have satisfied O&Y’S appetite for expansion. Said Reichmann: “We are not really searching for new acquisitions. For the next six to 12 months we plan to consolidate our present holdings.” But with the Gulf purchase still a possibility, the stock markets may soon fill with rumors again, because O&Y is on the move.