BUSINESS

SQUEEZE PLAY

THE REICHMAN FACED RENEWED PRESSURE TO SELL OFF ASSETS AND PRODUCE A NEW FINANCING PLAN

DEIRDRE McMURDY May 11 1992
BUSINESS

SQUEEZE PLAY

THE REICHMAN FACED RENEWED PRESSURE TO SELL OFF ASSETS AND PRODUCE A NEW FINANCING PLAN

DEIRDRE McMURDY May 11 1992

SQUEEZE PLAY

BUSINESS

THE REICHMAN FACED RENEWED PRESSURE TO SELL OFF ASSETS AND PRODUCE A NEW FINANCING PLAN

Swarms of corporate financiers in dark suits jostled with cardigan-clad individual shareholders for seats at the annual meeting of Gulf Canada Resources Ltd. in Toronto last week. And although Gulf's largest investors, the Reichmann brothers, were conspicuously absent, they cast a long shadow over the gathering. As the owners of the financially distressed real estate company Olympia & York Developments Ltd. of Toronto, the Reichmanns are struggling under mounting pressure from their creditors to sell off assets, including their 75-per-cent stake in Gulf, to reduce their $14.3-billion corporate debt. But while they remained coy about the fate of Gulf, the Reichmanns used that company’s annual meeting to convey the message that O&Y’s 65-per-cent stake in Home Oil Ltd. of Calgary, owned in conjunction with Gulf, ¿son the auction block. Its sale could raise more than $600 million in sorely needed cash.

But Gulf’s annual meeting was one of the few things that went according to the script for the Reichmanns last week. Despite earlier indications that Ottawa and Queen’s Park would undertake loan guarantees to smooth O&Y’s financial restructuring, sources in both governments last week appeared to rule out any assistance. As the governments backed away from a proposal to help refinance the Exchange Tower in downtown Toronto, a group of creditors who are owed about $140 million secured by a mortgage on the building threatened to plunge O&Y into bankruptcy if it did not repay the debt by mid-month.

The company also came under pressure from its international bankers last week to present a new interim refinancing plan for the $7-billion Canary Wharf project in London. The banks have been reluctant to provide O&Y with the $230 million it has requested to keep its operations at the giant project afloat. Then, as O&Y’s strategists continued their scramble to

raise new cash, Robert Campeau, the former chairman of the bankrupt real estate and retail conglomerate Campeau Corp., sued O&Y for $1.25 billion for alleged breach of promises.

The prospects for this week were equally glum. On May 4, a $26-million interest payment falls due on a $475-million bond program for First Canadian Place in Toronto. O&Y is

already in arrears on bond and mortgage payments of about $1.5 billion, and it was not expected to meet its Canadian Place obligations. The company has already called a meeting for May 19 of the bondholders for 55 Water Street in New York City, who are owed $647 million. It is expected to appeal to them to defer a $41-million interest payment due on June 30.

As well, this week, the restive Exchange Tower commercial paper holders will gather to

plan their strategy for a confrontation with O&Y executives on May 20 in Toronto. Under the terms of the trust agreement, if 25 per cent of those investors declare O&Y in default on the debt, they can claim Toronto’s Exchange Tower and its rental income. The paper holders have grown increasingly frustrated over the past week, vocally criticizing the program’s

trustee, Royal Trustco Ltd., owned by Trilon Financial Corp. of Toronto, for its slow response and O&Y for its failure to provide updated information.

Still, the gathering storm may not produce a bankruptcy thunderstroke for the Reichmanns. For one thing, it is doubtful that a forced sale of the Exchange Tower would quickly raise the cash that the creditors are demanding. According to a report issued by the Dominion Bond

Rating Service Ltd. of Toronto, the building, appraised at $473 million in 1990, would raise only about $300 million on a distress-sale basis. The rating report notes that about 15 per cent of the building’s 881,000 square feet of leasable office space is vacant, and estimates that it would take up to six months to find a buyer for the property. Said one pension fund manager on condition of anonymity: “It’s a real ‘gotcha’ for investors. They don’t have many alternatives to being patient.”

As O&Y’s creditors exert more pressure, company executives are being forced to contemplate the sale of some assets—including real estate—that the Reichmanns have said in the past they would never dispose of. Some sales could prove complicated because many O&Y holdings are pledged as collateral for its debt. But O&Y did manage to raise $65 million in April with the sale of a 7.13 million share

block in Trilon to the Ontario Teachers Pension Plan Board. Through the restructuring and sale of its interests in Interprovincial Pipe Line Co. Ltd. of Edmonton, O&Y acquired another $335 million in special dividends.

The company also has a 35-per-cent stake in Canadian real estate developer Trizec Inc. of Calgary. But according to Ross Cowan, an investment analyst with Levesque Beaubien Inc. in Toronto, the uneasy real estate climate—worsened by O&Y’s troubled condition—has depressed the value of Trizec’s

shares. In addition, only about 10 per cent of O&Y’s Trizec holding is available for a quick sale: the remaining 25-per-cent block is subject to a complicated voting trust partnership agreement with Trizec’s parent company, Carena Properties Holdings Inc. of Toronto. Added Cowan: “It’s not easy to unwind so it’s not easy to liquidate.”

As potential sources of ready cash, O&Y’s investments in Gulf and Abitibi-Price Ltd. of Toronto are also questionable. O&Y was able to dispose of its 64-per-cent investment in Interprovincial Pipe Line by selling the shares to the public through a syndicate of 12 investment dealers, solving the problem of finding a single buyer large enough to absorb 25.2 million shares. Although a similar approach might also work with Abitibi and Gulf, both companies are in the throes of corporate overhauls in reaction to sharp cyclical downturns in their businesses.

For its part, Gulf withdrew from the Hibernia oil megaproject last February and mothballed its Arctic exploration program to conserve cash and focus on more easily recoverable oil reserves.

But one of O&Y’S missteps in the Canadian Oil Patch may soon turn to its advantage. When it acquired its twothirds stake in Home Oil as part of a complex transaction in 1990, O&Y planned to merge Home with Gulf, creating the third-largest oil producer in Canada. That plan was scuttled, however, by Home’s minority shareholders. And in the past year, oil analysts say, Home has steadily reduced its debt and worked to maintain its base of western Canadian oil and gas production. By the end of 1991, its assets were valued at about $1.5 billion.

At least one suitor has already expressed an interest in Home: Bow Valley Industries Ltd. of Calgary, which is g controlled by British Gas PLC. 5 A sale to British Gas could be z made easier by the fact that I the U.K. company is a part| ner with Gulf in a Russian I oilfield project. Also smooth“ ing the sale is a recent change in federal policy—lifting restrictions on foreign acquisitions of Canadian oil and gas assets.

The $800 million that a successful sale of Home could pump into O&Y’s accounts would go a long way towards reassuring the Reichmanns’ increasingly agitated creditors. But it will have to take place soon if it is to forestall the looming deadlines set by the family’s creditors.

DEIRDRE McMURDY