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NYC hedge fund gets heat in telco case

By
Michelle Celarier
Published Oct. 11, 2012, 4:00 a.m. ET

A Manhattan hedge fund’s no-brainer investment in a Canadian telecom is turning into one huge headache.

Mason Capital Management is being widely criticized for its attempt to scuttle a move by Vancouver-based Telus to collapse its dual-class stock structure. If successful, Mason could generate tens of million of dollars in profits for the $8 billion fund.

The unusual foray into shareholder activism by Mason has sparked an unusual amount of debate because the fund has no economic interest in Telus — it’s perfectly hedged by being long the voting shares and short the non-voting shares.

For Mason to profit, it is merely seeking to increase the price spread between the two classes of shares.

Mason owns about $2 billion of Telus voting shares, but its short gives rise to the accusation of “empty voting.”

“Mason is indifferent to the overall value of Telus itself,” a Canadian judge said last month in denying Mason’s bid to hold its own shareholder meeting.

The Telus vote on collapsing the share classes is set for Oct. 17.

Two proxy advisory firms, Glass Lewis and Institutional Shareholder Services, have backed Telus’ plan, and blasted the hedge fund’s empty-voting tactic.

“Mason has no long-term interest in the company’s non-voting shares and will ultimately reap significant gains if the proposed conversion does not garner sufficient shareholder support,” said Glass Lewis, in its recommendation.

The Mason-Telus showdown has become such a huge talking point in corporate litigation circles that Wachtell Lipton, a Manhattan law firm with no ties to the case, felt compelled to chime in and describe Mason’s move as “deeply pernicious.”

As the battle has become more heated in advance of the vote, Mason and Telus have hired competing experts on empty voting to help sway shareholders to their side. Northwestern University Law professor Bernard Black was hired by the fund; the University of Texas’ Henry Hu backs Telus.

In addition, Mason sent a letter to shareholders last week outlining its arguments against Telus’ plan, saying that investors would relinquish 46 percent of their voting power “for no compensation.”

Mason can’t lose much money if Telus’ shareholder plan passes. Its downside risk is limited to the 50 cents spread when it placed its bet, making it appear to be a clever trade, according to a Mason investor.

If Mason prevails and shares return to a historical average $2.50 spread, it would make five times its money — or a little more than $45 million. That would earn Mason about 50 basis points, which would help Mason. The fund lost 3 percent through September.

Such empty-voting strategies are uncommon. However, in 2009, Perry Capital paid $150,000 to settle with the Securities and Exchange Commission on an empty-voting charge related to the merger of Mylan Laboratories and King Pharmaceuticals.