It was a marriage made on Bay Street. Both the suitor, Royal Bank of Canada chairman Allan Taylor, and the financial partner that he had courted for two months, Royal Trustco Ltd. chief executive James Miller, wore grey suits. They appeared at a hastily called news conference last week to announce that the bank will pay $1.6 billion to buy most of beleaguered Royal Trustco’s operations, including its 146 Royal Trust branches across Canada. The setting for the media reception was bleak: a windowless basement auditorium beneath the Royal Bank’s Toronto headquarters. Present with their photographers and cameramen were about three dozen reporters, who dined on dry tunaand egg-salad sandwiches and tepid soft drinks and coffee. Royal Trust chairman Hartland MacDougall and Royal Bank president John Cleghom joined Taylor and Miller at the head table. But despite the drab surroundings, Taylor and Miller were as giddy as two bankers in their 60s can be after finally consummating a long-awaited deal between Canada’s largest bank and second-largest trust company. “We are excited about the opportunity of linking the name Royal Trust with our own,” said Taylor. Added Miller: ‘We’re pleased to be joining the Royal family.”
But the pleasantries could not disguise the fact that severe financial difficulties pushed Royal Trustco to the altar. Later that day, the company released preliminary financial estimates that showed that it lost a staggering $850 million last year, compared with a profit of $107 million in 1991. Those losses are the legacy of the company’s aggressive expansion into U.S. and British commercial real estate markets in the late 1980s. Like many other Canadian trust companies, Royal Trustco has been battered by the global real estate collapse in the early 1990s. And its troubles have been compounded by problems at Peter and Edward Bronfman’s debtladen Hees-Edper group of companies, which controlled Royal Trustco. As a result, the bank won highly favorable terms, agreeing to buy Royal Trustco’s venerable Canadian operating subsidiary, Royal Trust, and its U.S. and European operating subsidiaries. Royal Trustco is left with a $4.3-billion portfolio of Canadian, U.S. and British loans that it will have to try to collect under a new, as-yet-undecided corporate name.
Regardless of the financial details, last week’s deal drove away at least some of the dark clouds hanging over the heads of Royal Trust’s 5,200 employees across Canada. Taylor said that two of the main attractions of Royal Trust for the bank are its “valued
and respected name,” which dates back to 1892, and the “very high calibre of Royal Trust’s staff.” But he stopped short of ruling out layoffs or branch closures in the coming months. The bank plans to maintain the Royal Trust name for its traditional trust operations, the management of wills and estates. However, it will likely integrate other lines of business, including Royal Trust’s mutual funds division, with similar departments of its own. Said Taylor: “As we go forward, we will be looking for ways to be more productive.” Some financial analysts were more direct, predicting that cutbacks are inevitable. “There is a lot of overlap in the branch networks,” said Alain Tuchmaier, an analyst with the Toronto-based brokerage firm McLean McCarthy Inc. “There will be rationalization.”
Still, after the turmoil that Royal Trust employees have experienced recently, the announcement of the sale was clearly a relief. Morale at the company has declined over the past year following several heavy quarterly losses. It hit a new low in November after Royal Trustco’s then-chief executive, Michael Cornelissen, brandished a pair of foam breasts at a meeting with employees , poking fun at a magazine story that appeared with the headline “Royal Bust.” On Dec. 4,
shortly after that incident, Cornelissen stepped down in favor of Miller. The following month, Miller announced that Royal Trustco needed a cash infusion from an outside investor to revive the company.
Since then, several potential buyers have
pored over every aspect of Royal Trustco’s operations, adding to the employees’ uncertainty. Earlier this month, the company bused head office staff to an outing at a bowling alley in suburban Toronto in an effort to relieve tension. In the days leading up to the deal, Miller said that some employees worked almost around the clock. He added that Royal Trustco’s board finally approved the deal at 2:30 a.m. on March 18, the day of the announcement
Although clearly less ecstatic than Miller, executives and other senior officials in the Hees-Edper empire also said that they were relieved that Royal Trustco’s future now appears to have been resolved. Said George Myhal, president of Trilon Financial Corp., which owns 47 per cent of Royal Trustco: “I don’t know if Royal Trustco was ever a drain, but it certainly lifts a cloud of uncertainty from Trilon.” Royal Trustco’s other shareholders and debenture holders, as well as federal and provincial regulators, must also approve the transaction, a process that will likely take several months. If the complicated deal closes as planned, however, neither Trilon nor any of the holding companies above it in the Hees-Edper empire will receive any of the $1.6 billion in proceeds from the sale. As part of the deal, Royal Trustco agreed to eliminate its dividends on its preferred and common shares. Royal Trustco will also pay an undisclosed portion of the $1.6 billion back to the bank to repurchase loans from Royal Trustco’s portfolio that the bank does not want.
Indeed, soon after the deal was announced, some financial analysts said that the bank had forced Royal Trustco to sell off its most prized assets, but retain $4.3 billion in problem loans. Many of those stem from Cornelissen’s aggressive expansion into commercial real estate and into the United States and Britain in the 1980s. Miller, for one, said that three-quarters of those loans are still, in banking jargon, “performing,” meaning that the borrowers are keeping up with their payments.
Senator Trevor Eyton, the chairman of Brascan Ltd., one of the central holding companies in the Hees-Edper group, also dismissed suggestions that Royal Trustco or Hees-Edper had been backed into a comer. Eyton conceded that Miller’s attempt to find a buyer for all, not just parts, of Royal Trustco, “wasn’t something that was attrac-
tive to anyone.” But he added that the loans that the company has retained, “for the most part, are good assets.” Eyton also said that as Royal Trasteo collects those loans under a new corporate name, it will use the money to redeem preferred shares and debentures. He added that the company will “diminish in size as it attends to its business.”
At the same time, Eyton brushed aside persistent speculation that Brascan and the rest of the Hees-Edper empire are “cashstrapped.” In two lightningfast deals last month, the empire raised more than $1.9 billion. Brascan sold its controlling stake in John Labatt Ltd. for $933 million; in the same week, Noranda Forest Inc., another HeesEdper company, sold control of Macmillan Bloedel Ltd. for $971 million. But Eyton said that the group has been selling what he called “non-core” assets in an orderly way for the past two years. Both Labatt and Macmillan Bloedel, as well as Royal Trust, are operating companies that provided earnings for holding companies higher up the Hees-Edper ladder. Eyton, however, said that the two only represented about 15
per cent of the group’s total assets. He added that it still has plenty of sources of steady revenues, including resources giant Noranda Inc. and London Life Insurance Co. “We don’t need to sell assets,” Eyton said. “We’ve had problems and we’ve addressed them, we believe, satisfactorily.”
Eyton also said that analysts who now blame Comelissen and other Royal Trasteo managers for misguided decisions in the 1980s are being too simplistic. “There are a
lot of bodies around Canada and everywhere around the world,” he said. ‘We believe that we were slightly scratched and now we’re going forward.”
In fact, Royal Trasteo is only the latest in a series of major casualties in the troubled Canadian trust company industry, which banks and insurance companies are steadily swallowing. The sale of Royal Trasteo leaves Canada Trust and National Trust as the last two major independently owned trust companies in Canada. Like the cases of Central Guaranty Trust and Standard Trust, which larger institutions bought last year, Royal Trastco’s problems stem from the collapse in the value of commercial real estate loans it made near the height of the market in the late 1980s.
But John Evans, for one, president of the Ottawa-based Trust Companies Association of Canada, argues that Ottawa’s staggered deregulation of the financial-services sector in the 1980s hastened the demise of Royal Trasteo and many other trust companies. In essence, Ottawa allowed the banks to compete with trust companies for residential mortgages, but maintained the requirement that trusts invest 75 per cent of their loan assets in real estate. That, he said, pushed Royal Trasteo and others into more speculative lending.
Now, Evans says that he fears that the banks’ and insurance companies’ growing dominance of the financial-services sector will diminish competition. “The Big Six have never been known for their interest in introducing innovative products and caring for the consumer,” Evans said. He noted that trust companies, not banks, were the first to introduce daily-interest savings accounts, extended office hours and pre-approved home mortgages.
But bankers and insurance executives say that those fears are exaggerated. Taylor, for one, noted that even after buying Royal Trust, the Royal Bank will only have 14 per cent of all Canadian financial institution assets. Even some trust company executives expressed agreement. Mervyn Lahn, who retired as chairman of Canada Trust in 1990, argued that there will still be aggressive competition in a financial-services sector dominated by the Big Six banks. Said Lahn: “As far as I know, there are still only four comers at most street intersections.”
Whatever the impact on consumers, one thing bankers and trust company executives agree on is that the list of wealthy and eligible financial marriage candidates in the trust sector is getting shorter.
THE GREAT CANADIAN TRUST SELL-OFF
RECENT TRUST COMPANY BUY-OUTS AND MERGERS
1. Royal Bank of Canada (assets: $138 billion) buys Royal Trust (assets: $14 billion): March, 1993
2. The Toronto-Dominion Bank (assets: $74 Billion) buys Central Guaranty Trust (assets: $14 billion): January, 1993
3. North American Life Assurance Co.
(assets: $7 billion) buys First City Trust Co. (assets: $3.6 billion): January, 1992
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