Source: The Canadian Press

Auto parts giant Magna International Inc. has publicly released an independent evaluation of its plan to buy out founder Frank Stronach’s controlling stake in the company in the hopes of deflecting a regulator’s attempt to quash the deal.

The evaluation by CIBC World Markets sees a number of potential benefits under the proposal to eliminate Magna’s dual-class share structure, including the potential for a broader shareholder base and a higher stock price.

Magna (TSX:MG.A) emphasized that it feels it had already released enough information for shareholders to make an informed decision on the plan, but was releasing the evaluation to respond to concerns expressed by the Ontario Securities Commission earlier this week.

The provincial regulator said Tuesday that Magna’s shareholders are being asked to approve the plan without a recommendation by its board of directors and without sufficient information.

“Magna strongly believes that its existing disclosure is entirely appropriate and contains all information necessary to enable minority shareholders to make a reasoned judgment about the transaction,” the company said in a statement Thursday.

“Nevertheless, Magna is providing this additional disclosure in response to the concerns expressed by OSC staff.”

Under the Magna proposal, company founder Frank Stronach and his family trust would receive US$863 million in cash and common shares — a premium of 1,800% — to give up their multiple voting shares.

CBIC said it saw three major benefits that Magna could realize by eliminating the Stronach family’s voting control:

– A broader shareholder base, as there are several institutions that are invested in other auto suppliers but don’t currently have meaningful investments in Magna, possibly due to its dual-class share structure;

– Increased liquidity, as the average trading volume of Magna’s shares has increased significantly since the deal was announced;

– And a higher share price. Magna’s shares trade at a discount compared to its peers, such as Linamar Corp. (TSX:LNR), although they gained more than 14% on the Toronto Stock Exchange between early May, when Magna announced its plan, and Wednesday, when the market reacted to the OSC’s allegations by sending them lower.

Many institutional investors shun companies with dual-class share structures such as Magna’s, which give one group of shareholders — often the company’s founding family — voting control while holding a minority equity interest.

This is the case at Magna, where each of the Stronach family’s 750,000 class B shares has 300 votes, giving the Stronachs a 66% voting interest.

Some of Magna’s shareholders — including the Ontario Teachers’ Pension Plan and the Canada Pension Plan Investment Board — actually oppose the dual-class structure in principle, but have said they’ll vote against the proposal because of the premium it pays Stronach.

The OSC called the 1,800% premium “unprecedented.”

Reports say other institutional investors, including British Columbia Investment Management Corp., Alberta Investment Management Corp. and the Ontario Municipal Employees Retirement System, will also vote against the deal. However, Magna’s shares are very broadly held, and none of these investors hold more than 1% of the company’s stock.

Magna has said 24% of its Class A shares have been voted so far, with more than 99% approving the transaction.

If the proposal is approved, it will see Stronach give up his voting control in exchange for nine million class A shares — giving him a stake of about 7.5% — and control of a new joint venture that would develop electric vehicles and their components.

The OSC has called a hearing for next Wednesday during which enforcement staff will ask a commission panel to strike down the proposed transaction. Magna has called a shareholder vote on the plan for June 28.

Shares in Magna added 15 cents to $69.45 in early afternoon trading on the TSX.