ShawCor (TSX:SCL.A) has carved out a unique niche in the energy industry and grown to become a global leader in pipe coating services. Like its business, ShawCor’s ownership structure is somewhat unique. The company was, and still is, a family controlled entity. Even though the family owns just 18% of the company’s equity, it controls 69% of total shareholder votes. This is possible because of what’s known as a “dual-class share structure”.
A quick scan of the S&P/TSX Composite Index indicates there are 17 Canadian companies, representing about 6% of the total market cap of the Index, carrying a dual-class structure. The more widely held names include Rogers Communications (TSX:RCI.B), Teck Resources (TSX:TCK.B), Shaw Communications (TSX:SJR.B), and Alimentation Couche-Tard (TSX:ATD.B).
If you hold a diversified mix of Canadian stocks, chances are good that you own at least one of these 17 names. If so, at some point, you are likely to find yourself in a similar situation as the one that ShawCor shareholders now face.
The Situation
There will come a time when the family wants out. That time is now for ShawCor. On August 30, 2012, Ms. Virginia Shaw, the controlling shareholder, indicated to the Board that she was ready to sell. After several months of trying in vain to sell the company in its entirety, ShawCor shareholders now have the option to collapse the dual-class structure. Effectively, buy out Ms. Shaw.
This move carries positives and negatives and ShawCor Class A shareholders will vote on it at a March 14th special meeting.
Positives include a special dividend of $1.00 per share if the deal is affirmed, EPS accretion due to less shares outstanding, and common shareholders finally gaining control over the company.
The big negative is that cash on hand and debt financing are needed to buy out Ms. Shaw’s stake. This may impact the company’s ability to pursue future growth opportunities. In addition, that the company was not sold in its entirety after being shopped extensively indicates no other market participant was willing to pay the $43.43/share price tag that has been hung on Ms. Shaw’s shares.
The Decision
ShawCor shareholders are in an intriguing predicament. This company is cyclical and business is booming. Clearly, Ms. Shaw realizes this. Safe to say, non-controlling shareholders are not getting her stake on the cheap. The risk of not paying up for the stake and taking control of the company is what a spurned, and still in control Ms. Shaw might choose to do next. Non-controlling shareholders risk being presented with a less appealing scenario the next time around.
The Foolish Bottom Line
Once a controlling shareholder decides to exit, their motivation shifts from wanting to create the most valuable company possible, to wanting to extract as much value as possible from the company, and its remaining shareholders. They only get one chance to sell. Interests that were once aligned are no longer.
We are still on the first or second generation for many of these family controlled corporations. As controlling stakes get passed further down the generational ladder, dilemmas such as the one that ShawCor holders face are likely to become more frequent.
It’s hard to make a buy/sell decision on any of these 17 names simply because they have a dual-class ownership structure. However, because of the embedded conflict that arises when it comes time for the family to sell, these companies deserve a larger margin of safety before wading in. Be mindful of this dynamic.
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Fool contributor Iain Butler does not own shares in any of the companies mentioned in this report at this time. The Motley Fool has no positions in the stocks mentioned above.
