Capital developments

D'ARCY JENISH August 24 1987

Capital developments

D'ARCY JENISH August 24 1987

Capital developments


Among his advisers within the Toronto financial community, Paul Reichmann is known as “Mr. R” or simply “the man.” He is also recognized as the entrepreneurial genius behind the phenomenal success of Olympia & York Developments Ltd. (O&Y), the world’s largest real estate empire, which he runs with brothers Albert and Ralph. Over the past two years Paul Reichmann has masterminded two multibillion-dollar megadeals: O&Y’s takeovers of Gulf Canada Ltd. in 1985 and Hiram Walker Resources Ltd. in 1986. During the past month the Reichmanns have completed two deals that reflect their status as worldclass entrepreneurs. First they took over London’s faltering $6.3-billion Canary Wharf project, Europe’s largest real estate development. And a $517.5-million share offering in newly reorganized Gulf Canada Resources Ltd. created a stampede among domestic and foreign investors.

The Canary Wharf deal and the Gulf share offering would clearly ease any lingering doubts about the health of the Reichmann empire as a result of the Gulf and Hiram Walker takeovers. The debts that those two acquisitions— worth almost $6 billion—created have been almost totally eliminated, according to some sources. And in a breakfast meeting with selected members of the British press last month, Paul Reichmann revealed that O&Y has the resources to finance the Canary Wharf project internally. Meanwhile, the Gulf share offering revealed that international investors remain enamored of the Reichmanns. Although 23 million shares were available, investment firms handling the issue received orders for 45 million shares. The brothers have also completed a major restructuring of Gulf Canada designed to enhance the value of the company and the various assets that it controls.

Despite their rise to the top of the Canadian business community, the brothers—Albert, 58, Paul, 56, and

Ralph, 53—remain enigmatic figures who cherish their privacy. They avoid publicity and the press—unless contact fits with their plans. The Reichmanns have never revealed their personal worth or the value of their real estate and natural resources empire. The family’s vast holdings are controlled by O&Y Developments, which is a private company and as a result does not have an obligation to disclose its asset values, revenues, profits or debts.

Likewise, the brothers do not have to reveal their long-range goals or objectives. But most observers conclude that the Reichmanns are attempting to build a durable company by investing their real estate earnings in natural resource companies. Said Andrew Sarlos, a Toronto investment manager and family friend: “I think they will continue both the diversification and at the same time exploit the opportunities in the real estate sector.”

The Reichmann family originated in

Hungary but migrated to Vienna, then Paris, and finally Tangier, Morocco, during the tumultuous decade prior to 1940. In 1956 the family moved to Toronto and launched a tile importing business, which eventually led them into real estate. Currently, O&Y controls an estimated 50 million square feet of office space in major cities across North America, including Dallas, Portland, Ore., and San Francisco. One of their landmarks is the 72-storey First Canadian Place in downtown Toronto, which contains the executive offices of the Bank of Montreal.

Another Reichmann landmark, the World Financial Centre in lower Manhattan, is nearing completion. In 1981 a New York state agency selected the firm over a dozen other top bidders to develop the so-called Battery Park City site. Last week tenants were moving into the fourth and final office tower in the $2-billion, eight-millionsquare-foot complex, although the

project will not be officially complete until next spring. The Reichmanns have signed up a number of prestigious tenants, including American Express Co. and Merrill Lynch & Co., Inc., and eventually about 30,000 people will work in the four towers, which range from 39 to 53 storeys.

The brothers also own another 11 buildings in New York. Indeed, since 1984 they have been the largest private owners of office space in the city, now holding 24 million of the 300 million square feet in New York. Their portfolio still includes six of the eight buildings that they purchased in 1977 for $426 million when the city was in the midst of a severe economic downturn. That transaction, later described by real estate experts as “the deal of the century,” firmly established the brothers’ reputation as shrewd and daring operators.

Earlier this year, O&Y announced another project that will alter the face of New York. The company has reached an agreement with Gulf and Western Industries Inc., owner of Madison Square Garden, to build a new 22,000-seat arena several blocks from the existing building. Then O&Y will erect 4.5 million square feet of office space on the present Garden site. “The project is still at a very early stage,” said O&Y’s New York spokesman Peter Rosenthal. “It is far too early to talk about costs or completion _ dates.”

s For the time being, Canary Wharf is the major Reichmann project. It was originally conceived in 1984 by American developer G. Ware Travelstead, who lined up a consortium of U.S. and Swiss investment banks to finance the undertaking. He planned to build 8.8 million square feet of office space, 500,000 square feet of retail space and two 400-room hotels on 71 acres of abandoned dockland in East London. The $6.3-billion project, consisting of 24 buildings, will provide office space for 50,000 workers. It is expected to be completed in seven years.

Construction was originally expected to begin in February, 1986, but the project encountered problems. Two major financial backers, Morgan Stanley International and Crédit SuisseFirst Boston, would not permit construction unless the developer had signed up some major tenants. But prospective tenants refused to sign leases until the development was under way. The Reichmanns offered last February to take over the troubled project but were turned down. But

then Morgan Stanley and Crédit Suisse abandoned the development in June, and Travelstead was forced out. At that point Paul Reichmann became involved, negotiating a deal in July with the government agency overseeing the project.

Details of the agreement have still not been released, but according to British press reports O&Y will spend $357 million to acquire 100 per cent of

the Canary Wharf Development Company. The developer must also contribute $945 million toward the cost of new roads and an elevated light rail transit line through the site, which is about five kilometres southeast of the City, the financial heart of London. Reichmann told British journalists: “We will fund it ourselves. We can complete it on our own strength.” Meanwhile, the Reichmanns’ acquisition of Canary Wharf has been hailed as the project’s salvation. Said Archibald Cox Jr., managing director of London-based Morgan Stanley International: “They

are generally considered to be one of the best, if not the best, property developers in North America, and that means the world.”

While continuing to expand their real estate holdings, the Reichmanns have simultaneously moved to enhance the value of their resource holdings. In mid-June, Gulf Canada shareholders approved a complex company restructuring developed by Paul Reichmann, some senior O&Y executives and Merrill Lynch Canada Inc. Prior to this, Gulf Canada was a holding company that was 78.6-per-cent owned by O&Y. The balance was held by the public. A Merrill Lynch senior vice-president, Edmund Clark, said that Gulf, like most holding companies, was trading at a discount to its real value because it contained such diverse assets. “The parts were worth more than the whole,” he said.

Gulf Canada was divided into three companies as a result of the restructuring, and shareholders were given shares in each. Gulf Canada, the holding company, became Gulf Canada Resources Ltd., a pure oil and gas company. Abitibi-Price Inc., the giant newsprint producer, was put into a separate company, while a new company, GW Utilities Ltd., was set up to hold the diverse interests acquired in the Hiram Walker takeover. Clark said that Gulf shares were trading at about $15 before the reorganization was announced. Since then, the value of the investors’ new shares in the three companies has more than doubled.

As for the future, Reichmann watchers predict that the brothers have developed a strategic plan to ensure that their empire outlasts them. Family friend Sarlos said that the entrepreneurial skills of successful real estate developers cannot be institutionalized or readily passed on to the next generation. As a result, the brothers are increasingly shifting their wealth into companies such as Gulf Canada, which can be run profitably by professional managers. Sarlos added that the Reichmanns will continue to take advantage of development opportunities.

Still, if the next generation of the family fails to demonstrate the same genius for real estate, O&Y may eventually become a company that merely operates a portfolio of revenue-generating properties. But with another landmark project, the Canary Wharf, to build, the Reichmann brothers have assured themselves of a place among the giants of real estate development for years to come.