Business Notes

November 12 1990

Business Notes

November 12 1990




Trevor Eyton looks chagrined as he

sits in his memento-filled office overlooking Toronto’s waterfront. As one of the top two executives in Peter and Edward Bronfman’s corporate empire, known as the Edper group, Eyton coolly dismisses Bay Street’s frequent charge that he and the group are arrogant in the way they conduct their business. But then, Eyton concedes that perhaps he and his colleagues may have been guilty of “a little conceit.” For all of Edper’s past successes, Eyton acknowledges that, for the moment at least, the country’s most conspicuous and diverse corporate family is in a slump. Clearly, minor problems in a group that says it controls a complex web of about 100 companies, with roughly 100,000 employees and total assets of $100 billion, are worth noting, while a full-blown reversal of the

group’s fortunes can cause confidence in the nation’s economy to shudder.

The current year has certainly been a humbling one for the managers at the Edper group, which includes Edper Enterprises Ltd., the Bronfmans’ main holding company, and other major holding companies including Hees International Bancorp Inc., Brascan Ltd. and Carena Developments Ltd. Since the beginning of the year, the group’s image of invincibility has been altered as its profits and share prices have plunged, and Bay Street is taking the opportunity to make the group eat humble pie. In an unusual move for Edper, a group of top managers made a tour of investment houses in September and October to shore up confidence and revive the slumping share prices. But the investment community is unmoved by the group’s new openness.

“We have seen contrition, but not a diminution of the hubris,” said one respected Toronto analyst, who asked for anonymity because his company forbids its staff to talk to reporters. “The arrogance is still there.”

Fund managers and other investment professionals have long been wary of the complicated network of companies linked together under the Edper umbrella. Altogether, the two

publicity-shy brothers control about eight per cent of the companies that constitute the Toronto Stock Exchange’s composite 300 index. Under the shrewd guidance of Jack Cockwell, a South African-born accountant and longtime adviser to the brothers who holds senior positions at a host of Edper companies, the group has fashioned a complex web of companies linked by intricate cross-ownership arrangements and financing among group companies. Analysts say that one of the main reasons for the complicated structure is Cockwell’s desire to achieve what he calls “tax efficiency”—in other words, the corporate family is structured to ensure that its total tax burden is as small as possible. The strategy works so well that some profitable companies in the group pay no tax at all. One such firm, Royal Trasteo Ltd., the country’s largest trust company, reported

profits of $265 million in 1989, but collected $34 million more in tax credits than it paid in income taxes.

In addition to being complex, the financial structure required to support tax and financing strategy is constantly changing. Said Edper critic Stephen Jarislowsky of Montreal, a veteran investment counsel: “I don’t understand the structure and I don’t think anyone else does either, except the insiders.” Also, the group’s constant reshuffling and refinancing of its holdings make many investors uneasy. Fund managers and analysts alike say that the deals are structured to benefit the Edper group, not necessarily other shareholders. Said Jarislowsky, who manages about $11 billion, the largest pool of independent pension funds in the country: “It’s a game, and you better believe I know that it is not designed to favor me.” Jarislowsky, an outspoken advocate of minority shareholders’ rights, is one of the few investment managers willing to speak on the record about the Edper group, although other leading managers express similar concerns


Edward Bronfman Family

Peter Bronfman Family

Edper. Group Managers

Edper Holdings


Edper Enterprises

Hees HoLdings

Brascan HoId~ngs

Hees Internetiona!

Carena Holdings


carena Developments

John Labatt

Triton Financlat

Trizec Corp.

Consolidated Carma Corp.


Royal Trustco

Bramalea Ltd.

Brookfield Developments

London Life

Coscan Development

privately. Complained one analyst: “The dealer always seems to get the cards he wants, and the house always wins.”

Eyton, 56, whom Prime Minister Brian Mulroney named to the Senate in September but who, for the time being, has retained all his titles with Edper companies, including president and chief executive officer of Brascan, acknowledges the critics’ complaints about complexity. Eyton says that the group is now trying to simplify its diverse stable of holdings. But Eyton added, “We are big, we have been successful, and people love to knock us.” In the past 20 years, Peter and Edward Bronfman, 61 and 63 respectively, have turned their $30-million inheritance into the most extensive corporate empire in the country. The brothers went out on their own after their uncle Samuel Bronfman made it clear that there was no room for them in the family liquor business in Montreal—their initial stake was smaller than that of their cousins, Edgar and Charles, who took over the Seagram Co. Ltd., the family’s liquor business. The brothers avoid publicity and rarely talk to the media.

The battering the group’s shares have suffered on the stock market this year is one of the most public failures Edper has ever experienced. The group’s companies are concentrated in three main sectors: natural resources, real estate and financial services. For the most part, each is tightly managed on conservative

financial principles. Analysts are divided about how the group’s debt levels compare with competitors’ because they disagree over the impact of the group’s favorite financing mechanism, preferred shares. But, in the past, many Edper companies have enjoyed above-average growth and profits. Still, the Edper companies have been hurt by high interest rates, which have dragged down real estate values, and by the appreciating Canadian dollar, which lowers export earnings for resource companies. In Edper’s case, those two factors have combined with investors’ current aversion to holding companies, causing both profits and stock prices to fall. At their worst point, in midOctober, many of the Edper group companies’ shares traded at prices that were about half the level they had reached at their highest point in the past 12 months. By comparison, the Toronto Stock Exchange’s composite index of 300 leading companies was down 25 per cent during the same period.

That decidedly negative rating from the stock market has come as a sobering blow to the group’s managers. Eyton said the group had been expecting that the slowdown in the Canadian economy would hurt the companies’ financial results and their share prices. But he added, “It came a little earlier and is certainly deeper than we imagined.” In many cases, the drop in share prices has hit Edper companies harder than their competitors, leading some

analysts to conclude that the market has put a discount on group shares. Says Willard L’Heureux, president of Hees International Bancorp Inc., a merchant banking operation and a linchpin company in the group: “I don’t know if there is an E [Edper] factor. But if there is, then I hope we also get the credit when the market improves.”

In the Edper group, senior managers, including Eyton and L’Heureux, have a direct personal interest in share prices. Under the group’s much-touted compensation system, managers are paid relatively low salaries, but are expect-

ed to take no-interest, five-year loans from their company to buy shares in the companies they run. A typical executive is likely to be in debt to his company for well over a million dollars.

In today’s market, with so many slumping share prices, investors can afford to be choosy. Analysts say that, given the current uneven state of the economy, investors generally prefer to buy individual operating companies that are expected to perform well during the recession. On the other hand, they are avoiding diversified holding companies like those in the Edper group, which represent an investment in a collection of companies.

Said one analyst, whose company’s policy also does not allow its employees to speak to reporters: “Edper feels that, by laying on the hands of the South African Mafia genius [Cockwell], they elevate the shares to something mystical—that Bay Street

should pay a premium for their input. I think they are particularly disappointed that they are getting a discount instead.”

In line with stock-market trends, Edper’s extensive real estate holdings have been hardest hit during the current downturn. Bramalea Ltd., a leading real estate developer whose offices, shopping centres and business parks across the country include the Town ’n Country Mall in Moose Jaw, Sask., and Yorkdale Shopping Centre in Toronto, saw its share price drop 75 per cent since the beginning of the year to $5.50 in September, before recov-




NOV. 2/90



























ering slightly in October. While real estate stocks in general have fallen far more than might be expected, given current real estate values, one real estate analyst said that the Edper real estate companies have been even harder hit because investors avoid complexity in times of uncertainty.

Another important Edper holding, Noranda Inc., a massive resource company with interests in forestry and mining, is suffering because of the negative impact of the unusually strong Canadian dollar on sales abroad. Noranda Inc. says that, at the current exchange rate, a onecent drop in the value of the Canadian dollar would add $23 million a year to the company’s bottom line. And a drop in interest rates of one percentage point would add another $19 million. Despite Noranda’s poor profits during much of the 1980s, Eyton says that the group does not regret its investment in natu-

ral resources. “They are not making any more of them,” he added. Moreover, he said, pressure from environmental groups has made it harder for companies to open new mining and forestry operations—making existing operations even more valuable.

Still, the weak performance by the real estate and resource sectors is clearly visible in the group’s bottom-line results. Edper Enterprises Ltd., the public holding company at the top of the brothers’ empire, reported a discouraging plunge to $3.6 million in its third-quarter earnings, down from $27 million in the same

quarter of 1989.

Neither Eyton nor L’Heureux will predict how long or how deep they expect the downturn in their companies’ fortunes to be. L’Heureux says that, for now, managers will emphasize cost-cutting and wait for the cycle to turn around. “Peter Bronfman is very relaxed,” he added. “He’s been through this three or four times before.”

Meanwhile, even Jarislowsky acknowledges that he might eventually buy shares in some of the group’s companies. “Maybe at some point, when they get enormously cheap, I will close my eyes and hold my nose and say I’m going to buy this company on the basis that it’s an outright gamble,” he said. “If I buy three of them, I might make money on two.” Arrogance is one thing, business is another.