BUSINESS

A failure of trust

Concerns about a subsidiary rock Edper

DEIRDRE McMURDY February 1 1993
BUSINESS

A failure of trust

Concerns about a subsidiary rock Edper

DEIRDRE McMURDY February 1 1993

A failure of trust

BUSINESS

Concerns about a subsidiary rock Edper

DEIRDRE McMURDY

Even by the heady standards of the 1980s, the partners of Hees International Bancorp Inc. were known in Canadian business circles for their confident, aggressive style. Flush with the cash and the influence of Seagram liquor heirs Peter and Edward Bronfman, the secretive, tight-knit squad of merchant bankers personified the brash spirit of the time, scorning those who followed convention and played by the established rules. As a self-styled brain trust of the sprawling group of companies assembled under the Bronfman’s “Edper” banner, the Hees partners provided strategic financial and management advice to the growing web of company-controlled corporations. But by the late 1980s, they boldly branched outside the group and began promoting their services as so-called workout specialists, with expertise in restructuring troubled companies. At one time, senior partners at Hees even spoke publicly of their ambition to take over and rejuvenate a major Canadian chartered bank. But with the insolvency of Edper-controlled real estate company Bramalea Ltd. of Toronto, the recently announced sale of troubled Toronto-based Royal Trustco Ltd. and a crisis of public confidence in other Edper holdings, the team from Hees no longer has to look beyond the group to find companies in need of help.

Indeed, long-simmering uncertainty about the future of Royal Trust and other interlocked Edper-controlled companies erupted into panic last week as shareholders scrambled to sell their Edper stocks. In steady trading on the Toronto Stock Exchange, the shares of key Edper companies hit record lows. Among the hardest hit were Royal Trust, which fell 53 cents to $2.11 a share, Trilon Financial Corp., which lost 45 cents to close at $3.15 and Hees, which dropped 67 cents to finish the week at $6.87. Said one Torontobased securities trader, on condition of anonymity: “There is just no sense in the market of how far things are going to unravel or where the bottom lies.”

One cause for concern among investors is that group managers, headed by Edper architect and chief strategist Jack Cockwell, have already taken most of the obvious stabilizing measures. Indeed, over the past two years, Edper-controlled companies have sold off more than $3 billion in various assets to bolster cash reserves, to service debt and to simplify the corporate structure—and that

trend is expected to continue in 1993. “We have no specific target for dispositions, but we are certainly looking very hard at what fits and what performs,” said Robert Harding, chief operating officer at Hees. But according to investment analysts who follow the group, the process of unwinding the complex Edper empire will be increasingly fraught with complications—especially once the prime assets have

been sold to raise much-needed cash.

Although some assets within Edper-controlled operating companies, including Royal Trust’s retail trust division, may find willing purchasers, problem areas are not likely to be included in any sales negotiations. That fact became clear last year when Royal Trust sold the healthy assets of its U.S. division, Pacific First Financial of Seattle, but was compelled to retain the company’s sizable portfolio of nonperforming loans. “They aren’t exactly bargaining from a position of strength in these situations,” said an investment analyst, who spoke anonymously.

Another major obstacle as Edper attempts to dismantle its empire is the existence of about $5 billion in preferred shares issued and held by group companies. Those investment portfolios of preferred shares will have to be redeemed or

dissolved before operating companies like brewing and entertainment conglomerate John Labatt Ltd. of Toronto can be sold outright. In addition, the steady sale of healthy operating divisions clearly diminishes the ability of companies at the bottom of the interlocked corporate structure to feed those above it with dividend income.

Last year, as corporate earnings tumbled, Edper group companies on average still paid out more in shareholder dividends than their stocks earned. Analysts say that the purpose of that policy was in part to nourish the holding companies at the top of the pyramid of Edpercontrolled corporations. Labatt, for one, distributed $800 million in cash from onetime asset sales to its shareholders, including toplevel Edper companies, in 1992. “It’s the corporate equivalent of eating your young,” said the investment industry analyst.

Because of the tightly interwoven structure of the Edper empire, it is difficult to contain problems after they appear in any of its companies. Investors’ anxiety over Royal Trust’s admission of its need for an infusion of capital quickly spread last week to its majority shareholder, financial services conglomerate Trilon Financial Corp., as well as to Hees. Although Trilon executives publicly stated that they were still prepared to honor a $ 100-million commitment to purchase equity the next time that Royal Trust issues shares, investors were clearly not convinced that the company is in a position to fulfil such promises. In fact, some industry analysts claimed that the company may soon be forced to divest other financial assets, including its majority interest in London Life g Insurance Co.

3 The uncertain future of Trilon, I which also controls national realtor as Royal LePage and the Wellington I Insurance Co., was especially unsettling for major institutional inves“ tors, including the Ontario Teachers’ Pension Plan Board. In April, that fund paid about $80 million, or roughly $9 a share, to acquire a 9.5-per-cent stake in the company from bankrupt Olympia & York Developments Ltd. of Toronto.

The senior strategists in the Edper edifice also have a direct stake in the collapse of the group’s share prices: most of them have borrowed heavily to buy shares when they were at significantly higher prices. They are now saddled with debts secured by shares that have lost much of their former value. For minority shareholders, the financial squeeze on top managers at least ensures that those who built the Edper empire will be around to help to wind it down. And if the group’s financial position continues to deteriorate, those loans guarantee that the Hees-Edper partners may hide—but they cannot run.