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KerrisdaleCapitalMIM:TheMenaceoftheSuperVotingShareholderKerrisdaleCapital

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MIM:TheMenaceoftheSuperVotingShareholder
PostedByKerrisdaleOnApril12,2011@9:24amIn|NoComments

Inthispost,wellprofileaninterestingcasestudythatillustratesthepotentialdangersofowning
shareswithinadualclasssharestructurewhereinsidersbenefitfromowningamajorityofthe
classwithsupermajorityvotingcontrol.
Recently,forinstance,weprofiledUrbanaCorp[1] ,whichhascommonsharesandAshares.The
publicshareholderspredominantlyholdthemoreliquidbutnonvotingAshareswhereasinsiders
ownamajorityofthevotingcommonshares.Inthisdualsharestructure,insidersdontowna
majorityofthecompanysequity,buteffectivelycontrolthecompanyviaowningamajorityofthe
votingshares.
Sometimes,insidersupermajorityvotingcontrolcanaddvalue,ifaninsidercanmakedecisions
thatmaybeunpopulartoshorttermorientedpublicshareholdersbutbeneficialforthelongterm
interestsofthecompany.Othertimes,asinthecaseofMIM,supermajorityvotingsharesby
insiderscansubstantiallydestroyvalueforpublicshareholders.
In2003,autopartsmakerMagnaAutomotivespunoffownershipoftheirrealestateassetsasMI
Developments(NYSE:MIM).Inshort,MIMownedfactoriesandofficespaceandreceivedsteady
rentalincomefromMagnaAutomotivethroughlongtermtriplenetleases.Thetwistwasthatthe
founderandcontrollingshareholder,FrankStronach,received400,000classBsupervoting
sharesinMIM,givinghimeffectivevotingcontrol.Also,MIMownedacontrollingstakeinamoney
losinghorseracingventuredubbedMagnaEntertainment(MECA),whichwasapetprojectof
Stronachs.Naturally,StronachandthemanagementofMIMmadepromisesthatMIMsstable
rentalincomewouldnotbeusedtofinanceongoinglossesattheunpopularhorseracingventure.
ThefirmwasspunoffinNovember2003forabout$23ashare,withfirmsincludingDavid
EinhornsGreenlightcapitaltakingalargestakeinthecommonClassAShares.
BelowisachartofMIMsharessincethecompanysspinoff.

[2]
Despiteassurancestothecontrary,MIMmadeanoffertobuyouttheremainingstakeofthe
horseracingventureinJuly2004.TheplanwastousetherentalincomeontheMagnafactories
torenovateandbuildoutslotmachinegamingroomsatracetracksinstatesthatwouldpermit
it.Shareholdersbalkedattheproposal.Afterthetypicalsetofmanagementresignations,
StronachquasibackeddownedandinsteadhadMIMlendthemoneytoMECA.Unsurprisingly,
horseracingpopularitycontinuedtodeclineandtheexpensiverenovationsfailedtopayoff.
Overtheensuingyears,MIMcontinuedtoextendeverlargerloanswitheverlightercovenants.
Finally,in2009,MECAfiledforbankruptcy,leavingMIMhighanddryformostoftheloans.
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KerrisdaleCapitalMIM:TheMenaceoftheSuperVotingShareholderKerrisdaleCapital

Toresolvethesituation,MIMmanagementproposedareorganizationthatwouldpaya$15/share
specialcashdividendtoshareholdersbyborrowingagainstMIMsstablerentalincome.MIMcould
thenuseitspositionasacreditortothehorseracingfranchisetoforecloseontheracetracks,
whichwouldthenbe51%ownedbyStronach.Wereitnotforaconcertedlegaleffortbythe
shareholdersofMIM,thedealwouldhavegonethrough.
Tomakemattersworse,juniorcreditorsofthebankrupthorseracingfranchisesuedMIMforthe
mismanagement.MIMsettledforabout$100mil,whichwastheproceedsfromthesaleof
severaloftheracetracksauctionedbythecourt.Theremainingracetracks,nowvaluedatonly
$350mil,weretransferredtoMIM.Butthestorydidntendthere,becauseFrankStronachstill
ownedthesupervotingsharesinMIMandhestillwantedtheracetracks.
Eventually,Stronachgotwhathewanted.Inexchangeforhis400ksupervotingshares,he
received480kregularsharesplusfullownershipofthehorseracingassets,adealvaluedatover
$900/SuperVotingShare.Andshouldanyonebesurprised?Tradedemocracyformonarchyand
well,thekingwillbehavelikeakingandhelphimselftothefattestpickingsofthefiefdom.
Superiorvotingcontrolleadstoasuperiorequityclaimontheassetsofacompany,andmustbe
contemplatedwhenevaluatinganequityinvestmentinadualclassstructurewheredifferent
shareclasseshavedifferentvotingrights.Atthetimeofthespinoff,investorsmayhavebeen
correctintheirvaluationofMIDevelopmentsassets.Butinvestorsshouldhavealsoaskedthe
followingquestion:justhowmuchdidStronachsmajorityvotingcontroldetractfromthe
companysvaluation?Insomecases,majorityvotingcontrolcanaddvalue.Butinthecaseof
MIM,wesawasituationwhereacontrolinvestorsdisregardforpassiveshareholderswasa
companysAchillesheel.

ArticleprintedfromKerrisdaleCapital:http://kerrisdalecap.com
URLtoarticle:http://kerrisdalecap.com/commentary/2011/04/12/mimthemenaceof
thesupervotingshareholder
URLsinthispost:
[1]UrbanaCorp:http://www.kerrisdalecap.com/2011/02/28/urbanacorp
[2]Image:http://kerrisdalecap.com/commentary/wp
content/uploads/2011/04/clip_image002.jpg

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