Bring an opportunistic financier together with a group of institutional investors who are dissatisfied with the underperformance of shares that they are holding in a company and there usually is trouble. And trouble there was last week when Onex Corp. of Toronto announced that, with the backing of several large investors—from Ontario teachers to a South American beer maker—it was making a bid for brewing and entertainment conglomerate John Labatt Ltd. of Toronto. Gerald Schwartz, chairman and president of Onex, said he would offer $24 a share, for a total of $2.3 billion, to gain control of Labatt and take it private. Schwartz promised that he would sell the company’s sports and entertainment assets, including the Toronto Argonauts, the TSN sports network and a 42-percent interest in the SkyDome stadium. Although Schwartz says that he is in no rush to dispose of Labatt’s 90-per-cent stake in the Toronto Blue Jays baseball team, he insists, “we intend to return Labatt to its roots and build on its core brewing assets.”
Labatt executives, however, have a very different plan in mind for the company and they have already declared their intention to strongly resist the Onex overture. After a meeting with Labatt directors last Friday, company president George Taylor declared: “We are confident that alternate arrangements will emerge which will more accurately reflect the true value of the company’s assets for all shareholders.” He added: “The board strongly supported my initial reaction that the price is an outrage and is wholly inadequate.” Despite that tough talk, Labatt managers could be thwarted by the enemy within their camp: the dissatisfaction of the major shareholders with Labatt has been openly brewing for several years. It began when Labatt took profits from its beer business and diversified into several other unrelated businesses,
investing in everything from dairy and pasta production to rock concert promotion. In addition to its core Canadian beer business, Labatt entered beer markets in other countries through affiliations with foreign brewing companies.
When its controlling shareholder, Brascan Ltd. of Toronto, sold its Labatt stake in 1993 to raise cash to support other parts of the troubled Bronfman empire, shareholders expressed the hope that Labatt management would take the company back to basics. Although some assets were sold, Labatt was still highly diversified. Last year, it spent $720 million—an amount that analysts immediately said was too high—to buy a 22-per-cent stake in Femsa Cerveza S.A. de C.V., a major Mexican brewing company that makes Dos Equis beer. With the plunge in the Mexican peso a few months later, the value of that investment fell almost by half. And while Taylor has indicated that Labatt would sell part of its stake in some of its sports and entertainment businesses, no deals were concluded.
Now, some of Labatt’s largest shareholders say that they have run out of patience with company management. One major investor, speaking on condition that he would not be identified, bluntly summed up Labatt’s dual problems as inadequate performance—and a bad attitude. “Even though they knew shareholders were unhappy, last fall Labatt came out with a poison pill strategy that was intended to thwart a takeover that they knew would have benefited shareholders,” he said. “That’s not a very friendly way to treat shareholders. There is no love lost for Labatt’s management.”
Schwartz, who has a long history of working successfully with disgruntled institutional investors, believes that he can generate greater value by breaking up and selling the different Labatt parts. Onex’s bid of $24 a share is a combination of $21.25 worth of cash and $2.75 in notes. The offer, which is expected to be formally presented to shareholders within a few days, will expire in about three weeks. Veteran beer analyst Michael Palmer, president of Equity Research Associates of Toronto, says the Onex bid is reasonable given his estimate of the breakup value of Labatt: about $25 a share. “It’s fair,” said Palmer. “But I’d expect that Labatt will be trying to line up a friendly outside buyer to come forward with a better bid—probably a big international brewing company.” In a terse news release, Taylor said: “This is a wholly inadequate proposal and does not reflect fair value to our shareholders.” The stock market also seemed to anticipate that another bid would be coming as it pushed the price of Labatt shares up by $2.50 to $24.37 on the day the bid was announced. By weekend, Labatt shares closed up at $25.13.
Broadcast and entertainment: The Sports Network (TSN), BCL Entertainment (75 per cent owned), Supercorp, Skyvision.
Financials: Net earnings of S155 million on sales of S2.32 billion for the year ended April 30, compared with a net loss of S70 million on sales of S2.14 billion a year ago.
LABATT AT A GLANCE
Brewing: Canada’s second-largest brewer (44-per-cent market share) produces Labatt Blue, Ice, Genuine Draft, Classic. Labatt also owns Birra Moretti, Italy’s fourth-largest brewer, and has a 22-per-cent stake in Femsa Cerveza, Mexico's second-largest brewer.
Sports: Toronto Blue Jays baseball team (90 per cent owned), Toronto Argonauts football team.
Onex countered that market pressure by releasing a chart that showed that the price of Labatt shares had been trading at around $20 before rumors of its bid began to circulate, pushing up the price of Labatt shares. Calculated on that basis, the Onex bid price of $24 represents a 20-per-cent premium over market price. Queried about the possibility of a second suitor launching a bidding war for Labatt, Schwartz noted that Onex could afford to raise its bid if necessary. Furthermore, he added that he has already informed Labatt executives that he is willing to raise his bid if they can provide financial information
that will prove that the company is worth more. Schwartz, who is experienced at valuing companies in leveraged buyout deals, said that it was difficult to assess the value of Labatt because key information is not publicly available. For instance, he noted that Labatt’s deal with Femsa allows the Mexican brewer to buy back Labatt’s stake at an undisclosed price.
A though Schwartz and Onex are fronting the bid and will have voting control of LBT Acquisition Corp., the company that has been formed to make the bid for Labatt, a number of other parties are involved in financing the initiative. The equity portion of the financing amounts to $940 million. Onex is putting up $106 million of that, plus its current holding of 2.8 million Labatt shares. South American brewing company Quilmes Industrial S.A. (known as Quinsa) will invest $312.5 million. The Ontario Teachers’ Pension Plan Board and the Hospitals of Ontario Pension Plan are each contributing $100 million. The remaining $250 million will come from an unnamed Canadian bank, as well as investment dealers Gordon Capital Corp. and Toronto-Dominion Securities Inc. Another $1.4 billion will be covered by loans made by a syndicate of banks, including the Bank of Nova Scotia, the Toronto-Dominion Bank and the Chase Manhattan Bank N A Athough this is Onex’s largest deal to date—and the first time it has attempted to take over a publicly traded company— the formula is a familiar one for Schwartz. Onex, Canada’s only major company specializing in leveraged buyouts, has made a business of taking over medium-sized, privately owned North American industrial companies, restructuring them to boost their value, and then selling them at a healthy profit within a few years. Among the companies Schwartz has bought since he founded Onex in 1980 are: packaging company American Can Canada Inc.; airline caterer Sky Chefs Inc.; Purolator Courier Ltd.; Beatrice Foods Canada Ltd.; and ProSource Distribution Services, a major supplier to fast-food restaurant chains such as Burger Kang and Wendy’s. Earlier this month, Onex announced that it would spend $700 million to acquire Caterair International Corp. of Bethesda, Md. Schwartz intends to merge Caterair with Sky Chefs to create the largest airline catering firm in the world.
But despite Schwartz’s reputation as a deal-maker, Onex shares one important similarity with Labatt: its own shareholders are dissatisfied. At Onex’s annual meeting earlier this month, they complained that the share price is languishing far below the $20.50 price that they paid for the stock when it was issued in 1987. Onex shares fell 25 cents to $13.13 on the day that the Labatt bid was announced. But Schwartz acknowledges that the disparity between Onex’s strong business performance—earnings of $163 million last year—and its stagnant share price is frustrating. “In 1994, we had the best corporate performance we’ve ever had, our net earnings were up 80 per cent, but our stock was down 23 per cent,” said Schwartz. “That’s pretty hard to take. But the market is the market, you can’t fight it.”
Observers suggest that part of the problem is that Onex is an unconventional and complicated company to follow because of the variety of its holdings. “Onex is a unique company, there is nothing like it in Canada,” said an investment analyst. “So shareholders don’t quite know what to make of it.”
For now, however, at least one set of shareholders are happier. With one bid on the table and the possibility that another may be coming, Labatt shareholders are clearly hoping that they will soon earn an improved return on a disappointing investment.
The story you want is part of the Maclean’s Archives. To access it, log in here or sign up for your free 30-day trial.
Experience anything and everything Maclean's has ever published — over 3,500 issues and 150,000 articles, images and advertisements — since 1905. Browse on your own, or explore our curated collections and timely recommendations.WATCH THIS VIDEO for highlights of everything the Maclean's Archives has to offer.