The $1,700,000,000 golden handshake

Inside the best deal Frank Stronach ever made.

There is one thing Frank Stronach’s supporters and critics can agree upon: the founder of the Magna International auto-parts empire is a very rich man. No one has benefited from Magna’s success more than El Presidente himself. And nowhere is this more apparent, or more lucrative, than in the jaw-dropping deals Stronach has struck for releasing his iron grip over Magna companies, the full details of which are only now coming into focus.

The Austrian-born industrialist has long drawn the ire of shareholder-rights activists, and even some investors, for using Magna money to support his personal passions, most notably his love of horse racing. But he was once seen as an early champion of the little guy. In 1984, he introduced the Magna constitution, which tied most executive pay to a fixed percentage of pre-tax profits. The goal, he said at the time, was to prevent him from acting like greedy executives who like to “stuff their pockets with all the gold they can find.”

The constitution, of course, has proven little impediment to Stronach’s corporate power, or his access to gold. The Magna empire evolved into a complex web of ventures, including some without constitutions. But Stronach maintained control of all things Magna with super-voting shares, despite typically holding relatively small ownership stakes in the companies he controlled.

That control had considerable benefits. For instance, over the past decade, Stronach has served only a part-time role as Magna’s chairman, but he was paid more than $250 million during that period.

There is nothing devious or underhanded about Stronach’s approach. He has always been transparent, even defiant, about his prerogatives as founder and controlling shareholder. But for years, analysts and investors complained that the “Frank factor” has hung over the stock like a dark cloud. Last year, management decided to try to remove that stigma by offering all investors equal voting rights, breaking Stronach’s dominance over the company.

To give up his super-voting shares, Stronach received US$300 million plus common shares worth US$563 million at the time. He also gained control of a potentially lucrative electric-car joint venture. And although he is not an executive, he’ll still participate in management profit-sharing programs until 2014, landing him an estimated US$120 million more.

Investor-rights activists challenged the deal, noting Magna’s board did not make a recommendation on whether shareholders should accept it. But the Ontario Securities Commission concluded there was not enough reason to intervene, despite finding the process that put the proposal before shareholders to be “fundamentally flawed” and “tainted by the involvement of executive management,” according to recently released documents.

And now MI Developments, a real estate company carved out of Magna’s assets to support horse-track acquisitions in 2003, has struck a deal with Stronach to move to a one-share-one-vote system. If approved, he’ll walk away with all of MID’s gaming assets, estimated to be worth as much as US$730 million. In total, Stronach seems set to collect at least US$1.7 billion in cash and assets for ceding control of his empire. And so, the Stronach era at Magna will end with a golden handshake that would impress even Midas.

Magna salaries
As Magna’s chairman, Frank Stronach receives US$200,000 per year to govern the board. He also gets a share of profits. At MI Developments, Stronach replaced former Liberal MP Dennis Mills as CEO late last year. As a result, his compensation may change. But the company has traditionally paid its controlling shareholder an annual salary of US$200,000. In 2009, he also received a US$2-million bonus for founding MID’s parent company.

Consulting fees
Magna traditionally cited Stronach’s position as the company’s founder to justify paying him consulting fees equal to about half the bonus money (6% of pre-tax profits) set aside to reward executive performance. As a result, Stronach’s annual compensation from Magna alone has ranged from US$1.9 million to US$40.5 million in the past decade. As part of Magna’s restructuring deal, Stronach will continue to collect an estimated US$120 million in consulting fees until 2014.

Stock market
Stronach had little incentive to eliminate its dual-class share structure, which allowed him to control the company despite holding less than 1% of its equity. In return for his super-voting shares, Stronach received US$300 million in cash plus common shares worth US$563 million (they have since increased in value by 85%). When it was announced, the deal paid Stronach a premium of 1,799% for his shares and diluted other shareholders’ holdings by about 11.4%.

Horse trading
MI Developments serves as an industrial landlord, but was spun out of Magna with a controversial stake in Magna Entertainment, a now-bankrupt horse-racing venture. Stronach cut a deal to transform MID into a pure real estate play with a single share structure in return for its remaining gaming assets, worth between US$585 million and US$730 million. The transaction values his shares between US$1,610 and US$2,009 each, despite a formal evaluation of US$50 each.