Telus Versus Mason: Telco Loses Battle but Prepares for War

Telus lost a battle to a New York hedge fund this week. But instead of recoiling to lick its wounds, the Vancouver-based telecom is waging war. 

Refusing to concede defeat, Telus CEO Darren Entwhistle insisted to investors that the telco has already begun plotting its alternative plan. But where did it all go wrong? The Globe and Mail breaks it down in a nutshell.

Telus has for years used an antiquated share structure in which nearly half of its equity investors were disenfranchised. The proposal would have ended that system, giving every share an equal vote, in a bid to make itself more attractive to investors. The idea was to reduce Telus’s cost of capital and put it on an even footing with rival BCE Inc., which uses a one-share, one-vote structure. But the plan, which was uncontroversial when it was first announced in February, ran into an obstacle when Mason Capital Management  revealed it controlled 19% of the voting stock and opposed the idea. It argued that converting non-voting shares to voting shares at a one-for-one ratio was unfair because it set the non-voting class up for an unjustifiable windfall. Those shares have historically traded at a lower price.

So Telus withdrew its proposal to collapse its dual-class share structure. But Darren Entwistle came out swinging just hours later: he served notice that the company would not alter the basic terms of the original deal – that is, to give a vote to the company’s non-voting shareholders with no extra payment to the voting shareholders.

“We’re intent on seeing it through with a one-to-one conversion – that is the only conversion ratio that is plausible for the Telus organization,” Entwistle told The Globe and Mail. “We’ll disclose the path that we are going to follow in due course and hopefully that won’t be in the too-far future.”

“We thank the many voting shareholders who voted against the proposal,” Mason declared in a statement. “Many have expressed that they paid a higher price for the rights and privileges that come with voting shares and believed that this proposal dilutes this valuable right without compensation.”

Telus is ready for war, and so is Mason. The hedge fund warned that it could be a thorn in the telecom’s side for some time to come, noting that “there is no reason to assume that Mason Capital will not be a long-term shareholder of Telus.” The Globe and Mail explained how Mason has so far outfoxed Telus:

The firm was using a trading strategy to exploit the historical price gap between the two share classes. Mason was betting that if it blocked the proposal, Telus’s non-voting shares would likely fall, relative to the voting shares, causing the spread to widen and allowing it to reap a profit. That is exactly what happened Wednesday. Telus voting shares declined 3 cents, or 0.05 per cent, to $58.13. The non-voting shares dropped more, falling 85 cents, or 1.5 per cent, to $56.15. As a result, Telus has accused the firm of being an unscrupulous “interloper” for using a tactic called “empty voting,” which is voting without an economic interest, to defeat the proposal for a tidy profit.

“I’m not saying, to be clear, that what Mason did was illegal. I find it morally objectionable,” Darren told the paper. “And I find it a great example of what is wrong within the capital markets and I think it is area where securities regulators need to step in.”

It’s hard to declare Telus the victim here, however. After all, Telus itself established this dual-class structure in the 90s when it was self-benefitting. There is a particular stench of hypocrisy in the company’s actions.