A windfall for Tricap

The sale of Stelco Inc. turns a tidy profit for some.

Investing in a troubled company is always risky. If the corporate turnaround doesn’t go well, good money gets thrown after bad. If the company somehow manages to reverse its flagging fortunes, however, that investment is like holding a winning lottery ticket. Tricap Management Ltd. cashed in that ticket in late August with the news that U.S. Steel Corp. (NYSE: X) was buying Stelco Inc. (TSX: STE), Canada’s last independent steel producer, for $38.50 per share.

Tricap — an investment fund specializing in corporate restructuring that is managed by Brookfield Asset Management (TSX: BAM.A) — holds about 10 million Stelco shares that are now worth an estimated $381 million. The fund, which has been integrally involved in both the restructuring and recapitalization of Hamilton–based Stelco, acquired the stock for less than $6 per share, says Neil Downey, an analyst at RBC Capital Markets. Stelco’s recent operating losses drive the carrying cost of those shares even lower, resulting in a massive windfall. “Participation in the Stelco restructuring process will yield an exceptional return on capital for [Brookfield] and its investment partners,” Downey wrote in a note to investors.

This isn’t the first time that Tricap turned a tidy profit on a risky restructuring. Last year the fund made $39 million when it sold its stake in Vicwest Income Fund, about $19 million of which went to Brookfield’s bottom line. Tricap had acquired 3.8 million Vicwest shares as part of its efforts to help the Ontario metal-roofing and siding firm restructure after it filed for bankruptcy protection in 2003.

Tricap is betting it can achieve the same success with other public companies. In April, Tricap entered into a $113-million recapitalization agreement with Central Alberta Well Services Corp. (TSX: CWC.A). As part of the deal, Tricap acquired 49.5% of the Calgary company’s voting shares for about 70¢ per share. They are now trading at about $1.70 each.

The fund has also been instrumental in the reorganization of Western Forest Products Inc. In 2005, Tricap funded WFP’s acquisition of Cascadia Forest Products Ltd. — a company owned by Brookfield. Since that deal, Tricap has increased its stake in WFP and currently owns 49% of the B.C. company’s common shares and 100% of its non-voting shares. After years of losses, WFP has now begun to turn a profit, thanks to the U.S.-Canada softwood lumber agreement and the cautiously optimistic outlook for Canada’s forest industry. Should that recovery continue, Tricap may have yet another winning lottery ticket to cash in.