Magna Spin-offs Pledge to Keep to Long-Term Strategies Amid Privatization Talks

From Canadian Press

TORONTO — Top executives at two Magna International spin-offs the auto parts giant wants to take private reaffirmed Tuesday that independent committees will analyze the bids and denied that outcomes in Magna’s favor have been pre-determined.

Senior executives at Decoma International Inc. and Tesma International Inc. said they’ll focus on their businesses and leave it to their board committees to decide whether to approve Magna’s bids to buy all voting shares of each subsidiary it doesn’t already own.

Magna, controlled by founder Frank Stronach, also wants to privatize Intier Automotive Inc. in a separate bid. The three privatization offers combined are valued at about $1.3 billion.

Aurora, Ont.-based Magna said it can respond more efficiently to customers as a larger company, reversing a long-time strategy that maintained smaller publicly traded subsidiaries could be more flexible to clients.

“Let me assure you, we are very aware of the need to remain focused on running the business . . . this transaction will not slow or impede progress we are making,” Decoma president and CEO Al Power said during a conference call with analysts Tuesday.

But both Power and Tesma CFO Tony Dobarnowski were questioned in separate conference calls about their own opinions of the bids and about whether the special committees will be truly independent in their evaluations.

“The special committee will be working with the financial advisers to determine whether or not the proposal as put forth by Magna is fair to the Tesma minority shareholders,” Dobarnowski told analysts.

“On the assumption that they reach the conclusion that it is, then obviously we would proceed with the preparation and filing of proxy material for a special meeting of the shareholders, where they would vote on the proposal.”

Dobarnowski was later asked by James Cole, a portfolio manager at AIC Ltd. and a Tesma shareholder, whether “assumption” meant executives already expect the privatization bids will succeed.

“It sounded in your choice of language that you might be pre-judging the outcome of the process,” Cole said during the conference call.

“I don’t think I consciously was,” Dobarnowski replied. “I was using that as an example.”

Power of Decoma, a company that makes auto exterior components, said it wasn’t appropriate for him to give an opinion given his own share holdings in the company.

“I am a significant stockholder, so I have the task of making sure all of us get the best value for the company if the transaction proceeds,” Power said. “But it’s in the hands of the special committee at this point and it’s probably best I don’t comment on it.”

Magna executives stand to gain plenty from the privatizations of Decoma, Tesma and Intier. Reports say that Power, for example, and his wife hold more than half of a million shares in Decoma and could receive a mix of cash and Magna stock if the transaction proceeds.

Observers have noted that the boards of directors at Magna and its spin-offs often overlap, creating some corporate governance concerns. For example, Manfred Gingl, chairman and chief executive at Tesma, is also executive vice chairman and a director of Magna and was notably absent during Tesma’s conference call.

Decoma’s special committee includes former Ontario Premier David Peterson, while Tesma’s includes former Dofasco chairman John Mayberry.

Tesma, which makes engine and transmission components, could save money as a private company by eliminating directors fees, costs of annual meetings, annual reports, statutory filings and news releases among other head office requirements. However, those savings might barely total $2 million, Dobarnowski said.

He added that the first time Tesma executives knew of Magna’s privatization proposal was several hours after stock markets had closed on Friday, Oct. 22. News wasn’t released publicly until before markets opened the following Monday, though Magna had indicated to the investment community on Friday that a corporate development was coming.

Prior to Oct. 22, “there was absolutely no communication with the management team that’s currently huddled here on this call with Magna with respect to this,” Dobarnowski said.

Cole and several other observers weren’t sure if Magna’s bids were legal offers because they hadn’t yet been filed on the SEDAR electronic regulatory filing system. Dobarnowski said the bid at his firm is being treated as a legal offer.

Cole also asked whether Decoma would consider alternate proposals, such as turning itself into an income trust. Dobarnowski said such talk was “premature” since the special board committee has only started its review.

Magna is hoping to complete the privatizations by the end of January.

The privatization talk came as both Decoma and Tesma posted third-quarter profits that fell below last year’s levels.

Tesma’s profit fell 22 percent to $12.3 million, while Decoma’s fell 76 percent to $3.5 million US. Both companies cited rising steel costs and lower industry activity, but both said they need to review ways to improve margins at underperforming operations.

However, Intier’s net earnings more than doubled in the third quarter to $21.6 million from $8.1 million last year. Quarterly sales rose to $ 1.27 billion from $1.04 billion.

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