Frank Stronach, the colorful founder of Magna International Inc, will release his grip on the world's No. 3 auto parts maker in a deal that will pay him nearly $900 million and encourage outside investment in the company.
The agreement, unveiled on Thursday, will end a dual-share structure that analysts say crimped Magna's valuation. The Class A shares, the only class that will remain, surged as much as 23 percent on the announcement.
The company, based in Aurora, Ontario, had more welcome news for investors. It said it roared back to profit in the first quarter, easily beating analysts' estimates as global vehicle production rates climbed and cost cuts boosted the bottom line. Magna also reinstated its quarterly dividend.
The agreement with Stronach, who started Magna in a Toronto garage and built it into global player with a market cap of around $7 billion, would eliminate Magna's Class B shares, through which Stronach controls the company.
The Stronach Trust has about two-thirds of Magna's voting rights through 726,829 outstanding Class B shares. It would get 9 million newly issued Class A shares, or about 7.5 percent of Magna, and $300 million in cash.
If approved in court and by shareholders, the deal would give 77-year-old Stronach, who emigrated from Austria to Canada at the age of 21 with a suitcase and $200 in his pocket, an $863 million pay day, based on Magna's Wednesday closing price.
The new structure would give one vote for each share. Currently, each Class B share carries 300 votes, something Magna says deters would-be investors and hurts its share price.
The point that they were making is exactly right, said David Tyerman, an analyst at Genuity Capital Markets. The company has traded at a discount to its peers, and perhaps to its fair value, for a long time and one of the things that comes up time and time again when you talk to investors, is their dislike of the dual=class structure.
Magna trades at a valuation around 4.6 times its expected 2010 earnings before interest, taxes, depreciation and amortization. Its peers average seven times their 2010 EBITDA.
Vincent Galifi, chief financial officer at Magna, said in a call with analysts that the deal, which could be completed by the end of the current quarter, would enhance the liquidity and marketability of shares.
Stronach, who is passionate about thoroughbred race horses, soccer and golf, is not retiring.
Part of the proposed deal would put him at the helm of a joint venture between Magna and the Stronach Trust to make electric and hybrid vehicles for other customers.
Stronach feels Magna is part of his blood, said Don Walker, Magna's co-chief executive. On a go-forward basis, he is a very big believer in the future of electric vehicles.
Magna would invest $220 million for a 73 percent interest in the joint venture. The Stronach group would invest $80 million for the rest of the stake but would have effective control with the right to appoint three of five board members.
WELL AHEAD OF ESTIMATES
Earnings came in at $223 million, or $1.97 a share, in the first quarter ended March 31. That compares with a loss of $200 million, or $1.79, a year earlier.
Excluding a gain of 12 cents a share on the sale of an electronics systems facility in China, Magna earned $1.85 a share, more than $1 ahead of analyst expectations of 80 cents, as compiled by Thomson Reuters I/B/E/S.
Revenue rose 54 percent at $5.51 billion.
Magna reinstated its quarterly dividend at $0.18 a share.
The company's North American light vehicle production rose 67 percent in the quarter, while in Western Europe production rose 33 percent. Complete vehicle assembly sales rose 11 percent in the quarter to $446 million.
Magna said it now expects 2010 sales to be in a range of $21 billion to $22 billion up from an earlier estimate of $19 billion to $20 billion, on higher vehicle production and content per vehicle in North America and Europe.
Shares of the Aurora, Ontario-based company ended up C$8.99, or 14 percent, at C$73.26 on the Toronto Stock Exchange.
(Additional reporting by Savio D'Souza in Bangalore; editing by Frank McGurty)