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CannTrust appoints head of committee investigating hidden cannabis
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By MARK RENDELL, ANDREW WILLIS
  
  

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Friday, July 19, 2019 – Page B1

The board of CannTrust Holdings Inc. has hired Bay Street law firm McCarthy Tétrault LLP and appointed U.S. sporting goods executive Robert Marcovitch to lead a special committee that is investigating how the company illegally grew 12,700 kilograms of cannabis in unlicensed facilities, and who knew about it.

Federal inspectors from Health Canada are auditing Toronto-based CannTrust after discovering the company grew cannabis in five unlicensed rooms over a fivemonth period in its greenhouse in Pelham, Ont. Sanctions could range from penalties for management to the cancellation of the company's cannabis production licences, which would effectively shut down the business. CannTrust's stock price has dropped about 40 per cent since it disclosed the regulatory issues on July 8.

The special committee is also expected to hire an investment bank to advise it on how to proceed. The shares closed up more than 2.6 per cent on Thursday after a speculative media report about early efforts to find a buyer for the company or its assets.

However, a source close to the company, to whom The Globe and Mail has granted anonymity because they were not authorized to speak to the media, said there is little chance it would sell major assets until it is clearer what penalties Health Canada will impose.

Potential deals or management overhauls will depend largely on the special committee, made up of four independent directors of the company led by Mr. Marcovitch, the Seattle-based former chief executive of K2 Skis and Ride Inc.

The committee also includes John Kaden of New York-based Navy Capital, Shawna Page, a former banker with Merrill Lynch Canada, and retired accountant Mark Dawber.

CannTrust is a major Canadian cannabis supplier, with more than 70,000 medical marijuana clients. In addition to facilities in Pelham and Vaughan, Ont., the company has applied for Health Canada permits on an outdoor cultivation facility in B.C. While at least one Bay Street investment bank is trying to win business by arranging bids for the company's assets, some rival producers are leery of potential liabilities.

In addition to the regulatory proceeding, more than a dozen U.S. and Canadian law firms have launched proposed classaction suits on behalf of investors against CannTrust.

CannTrust's market capitalization on Thursday was about $540-million.

"We believe that Health Canada must make an example out of CannTrust," analyst Greg McLeish of Mackie Research Capital Corp. said in a research note. "If Health Canada does not come down hard on the company, it will set a bad precedent for other 'law abiding' industry participants."

Mr. McLeish stopped publishing research on CannTrust on Monday, saying "management has lost credibility." He said the company's ability to grow cannabis in B.C.

is now in doubt, as it still needs Health Canada approvals and must plant marijuana by Aug. 5 if it wants reach its goal of harvesting outdoor plants in 2019.

Earlier this month, CannTrust disclosed it grew cannabis in five unlicensed rooms at the Pelham facility between October of last year and this March. In April, the company said it received Health Canada permits for the five rooms. In May, CannTrust sold US$200-million of stock priced at US$5.50 a share - its shares now trade at half that price. Chairman Eric Paul and the Litwin family, long-time backers of the company, sold US$30-million of CannTrust stock as part of that offering.

The timing of events could prove crucial in class-action lawsuits. The six investment banks that sold CannTrust stock in May were working with a company that had received Health Canada permits for all its Ontario cannabis production facilities, and if they are pulled into class-action lawsuits, they are expected to say they did their due diligence. As part of the deal, lawyers for CannTrust and its banks warned that the company would struggle if it ran into regulatory problems.

In a prospectus filed as part of May's stock sale, CannTrust said: "The ability of the company to obtain, sustain or renew any such licences and permits on acceptable terms is subject to changes in regulations and policies." The company went on to say: "The failure of any governmental authority to issue or renew such licences or permits upon acceptable terms would have a material adverse impact upon the company."

The company recruited former banker Peter Aceto as CannTrust CEO in October.

The company is tightly controlled, with Mr. Paul and members of Litwin family largely calling the shots at the board level.

The company's largest shareholder is CannaMed Financial Corp., which is co-owned by Mr. Paul and the Litwin family.

Most of CannTrust's directors were appointed by CannaMed, which had a monopoly on board appointments for a year after the company went public in the spring of 2017 through a voting trust with key shareholders.

CannTrust also has a service agreement with Forum Financial Corp., a private equity company owned by Fred Litwin, whose son Mark Litwin is on the CannTrust board. As part of the agreement, Forum provides CannTrust with "various managerial, operational and administrative services, including services related to the corporation's continuous disclosure and reporting requirements," according to company filings.

CANNTRUST (TRST) CLOSE: $3.84, UP 10¢ CANNABIS PROFESSIONAL This story first appeared in Cannabis Professional, the authoritative news service tailored specifically for professionals in the rapidly evolving cannabis industry.

To subscribe, visit tgam.ca/canpro

Associated Graphic

Toronto-based CannTrust, which has more than 70,000 medical marijuana clients, has two facilities in Ontario and has applied for Health Canada permits on an outdoor cannabis cultivation facility in British Columbia.

TIJANA MARTIN/THE CANADIAN PRESS


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CannTrust probe, sector woes hurt push for U.S. pot legalization, experts say
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By ANDREW WILLIS
  
  

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Tuesday, July 16, 2019 – Page B1

Health Canada's investigation into CannTrust Holdings Inc. and other coming-of-age issues in the domestic cannabis industry are becoming roadblocks to legalization of recreational marijuana in the U.S. market, according to industry experts, jeopardizing the growth plans at many Canadian companies.

Vaughan, Ont.-based CannTrust, which lists its shares on New York and Toronto stock exchanges, halted all cannabis sales last week after revealing federal investigators are probing the company for producing marijuana at unlicensed facilities. Analysts predict the company will face significant sanctions, potentially including cancellation of its cannabis production licences.

"We believe Health Canada must come down hard on CannTrust if it wants to maintain any credibility," said analyst Greg McLeish of Mackie Research Capital Corp. as he terminated coverage of the company in a report on Monday.

CannTrust's shares rose 19 per cent on Monday to close at $3.98 on the Toronto Stock Exchange.

The company has three facilities in Canada and sold US$170-million of shares at US$5.50 each in May, working with Wall Street investment banks, then moved into the U.S. market in June by acquiring farmland in California.

CannTrust's regulatory issues, along with short-seller attacks on Aphria Inc. and supply problems that have plagued Canadian retailers since the federal Liberals legalized recreational cannabis last October, are now colouring the U.S. debate over legal marijuana, according to New York-based investment bank Cowen Inc.

At a conference Monday that followed the U.S. House of Representatives' first-ever hearings on cannabis legalization last week, Jaret Seiberg of Cowen said Canada is considered a political pioneer in the sector. The Washington-based financial services policy analyst said problems in the country's nine-month-old cannabis market, including the Health Canada investigation into CannTrust, are closely followed by U.S. policy-makers. "The more problems there are north of the border, the more it complicates the issue of legalization in the U.S.," he said.

Canadian analysts are also pumping the brakes on U.S. legalization in the wake of last week's hearings at the House Judiciary Crime, Terrorism and Homeland Security subcommittee. Echelon Wealth Partners analyst Matthew Pallotta said Friday in a report: "Serious questions remain on how to best pursue reform, and whether there is sufficient support in the Republicancontrolled Senate to advance cannabis policy."

While U.S. federal restrictions on recreational cannabis are expected to remain in place for the foreseeable future, analysts expect more states to legalize marijuana, if only for the potential tax revenue. Cowen's analysts said in a report: "Unlike the federal government, states cannot run deficits.

With poor state finances, governors are looking for revenue wherever they can find it."

Canada's major cannabis companies and U.S. marijuana businesses that list their stock on a Canadian exchange have committed hundreds of millions of dollars to U.S. expansion strategies, in part on the expectation that Washington will eventually legalize marijuana.

Last week, Toronto-based Green Growth Brands Inc. agreed to acquired U.S. cannabis retailer Moxie for US$310-million, snapping up 250 stores in five states. Green Growth also sells cannabis products in the United States through a partnership with Designer Brands Inc., the parent company of DSW shoe stores (NYSE: DBI) and Abercrombie & Fitch Co.

In May, Canopy Growth Corp., Canada's largest cannabis company, paid US$300million up front for the right to buy a leading U.S. player in the sector, Acreage Holdings Inc., once cannabis production and sale become federally legal in the U.S.

Acreage operates in 20 states, with 87 dispensaries and 22 cultivation sites. Canopy's aggressive growth strategy and largerthan-expected financial losses prompted controlling shareholder Constellation Brands Inc. to terminate Canopy co-chief executive officer and co-founder Bruce Linton this month.


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The future is plastics: Murray Edwards, Li Ka-Shing add to oil patch holdings as others flee
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By ANDREW WILLIS
  
  

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Tuesday, July 9, 2019 – Page B1

In one of the great contrarian investments of our time, billionaires such as Murray Edwards and Li Ka-Shing are pouring money into Alberta's oil sands.

While foreign energy companies were selling their oil sands holdings and investors were purging domestic energy stocks from their portfolios, Mr. Edwards's Canadian Natural Resources Ltd. (CNRL) and Li family-controlled Husky Energy Inc. have increased their stakes in the region.

As part of a massive shift in ownership that has seen more than $37billion of oil sands assets change hands, CNRL dropped $16.5-billion to acquire properties from Devon Energy Corp. and Shell Canada Ltd., while Husky spent US$435-million on a heavy oil refinery last summer.

Both companies are expected to keep investing.

Why the show of faith from Mr.Edwards and the Li clan? As Dustin Hoffman's character was told in the film The Graduate, in one word, plastics.

Research from the International Energy Agency (IEA) and other non-partisan groups shows that "petrochemicals are the fastest growing source of oil consumption, and we believe this is not well known among the investment community," said energy analyst Phil Skolnick at Canadian investment bank Eight Capital in a recent report.

When it comes to demand for what Alberta produces, the IEA's studies show countries such as China and India will look to petrochemicals produced from heavy oil as a source of everything from fertilizer to packaging, digital devices, car parts and clothing.

Globally, at least 12 major oil refineries will come on stream in the next six years, according to Mr. Skolnick's research, with the capacity to process 4.5 million barrels of oil each day, including 2.4 million barrels of heavy oil, an Alberta specialty.

This new demand will come at a time when traditional energy suppliers such as Venezuela and Iran face significant headwinds to production. Venezuela's economy is collapsing and Iran faces geopolitical headwinds from its adversaries, including the United States.

Mr. Skolnick said: "There is a major fundamental shift happening, whereby the refining industry is moving away from maximizing production of transportation fuels to maximizing production of higher margin petrochemicals."

Soaring demand for plastics is moving refineries into the centre of the climate-change debate, with the industry moving to deal with the issues that come with increasing consumption of heavy oil and other fossil fuels. Last October, the IEA tabled what it called an "ambitious but achievable pathway to reduce the environmental impacts of petrochemicals," a series of measures that would cut air pollutants from chemicals production by 90 per cent over the next three decades, reduce greenhouse gas emissions by 60 per cent and halve ocean-bound plastic waste.

In releasing the report, IEA executive director Fatih Birol said: "Petrochemicals are one of the key blind spots in the global energy debate, especially given the influence they will exert on future energy trends."

It's currently fashionable to hate CNRL, Husky, Cenovus Energy Inc. and the other Canadian players that now control Alberta's oil sands. These companies sell every barrel of oil they produce at a significant discount to the price that rival producers receive for lighter grades of oil.

There has been a long and difficult battle over plans to build new North American pipelines.

And increasing awareness of climate change is shifting consumer sentiment away from gasolinefuelled cars and single-use plastics, trends seen as curtailing future demand for oil.

Against this backdrop, it's understandable that most investors, retail and institutional, are underweight energy stocks. Their recent experience has been unpleasant. An exchange-traded fund that tracks the S&P/TSX capped energy index, which has a lot of exposure to oil sands companies, has lost more than half of its value in five years.

The contrarian thesis, quietly embraced by Mr. Edwards and the Hong Kong-based Li family, is that over the long term, global demand for heavy oil will increase, supply will tighten and many of the problems facing Canada's producers can be solved. Mr. Skolnick expects an increasing amount of Alberta oil to be transported by rail, which will help shrink the difference between the price paid to Alberta producers and those in other regions.

The bullish case for the Alberta oil sands grows stronger if the federal government moves ahead with the long-delayed expansion of the Trans Mountain pipeline.

The best-case scenario is the controversial project will be finished by 2022.

Coming close to that schedule means Trans Mountain could be moving oil to Asian customers just as China becomes the world leader in refinery capacity, an event that's expected in 2024, when the country finishes a complex on its northeastern coast that rivals anything on the Gulf of Mexico.

Eight Capital, a Toronto-based firm led by chief executive David Morrison, thinks that development will benefit investors who load up on oil sands stocks such as Cenovus, CNRL and MEG Energy Corp., which turned down a takeover offer from Husky in January.

Mr. Skolnick said: "Given the expected impact and sustainability of petrochemical-related oil demand, we believe this is a theme that could garner the interest of generalist investors." In other words, people will wake up to trends that a pair of billionaires realized years ago.


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Canada's missed opportunity: Pot industry now being run out of U.S.
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By ANDREW WILLIS
  
  

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Thursday, July 4, 2019 – Page B1

$151-million Value of Bruce Linton's shares and options in Canopy based on Tuesday's closing stock price.

$323-million Amount Canopy lost in its most recent quarter.

26% The decline in the company's stock price since late April.

W ith Bruce Linton's firing, it's now all too clear that the biggest companies in Canadian cannabis are run out of New York and the state of Washington.

An industry that this country seemed destined to lead when the federal Liberals legalized recreational cannabis last October is increasingly dominated by foreigners. The opportunity to create global cannabis champions, based in Canada, appears to be vanishing. There should be a conversation around that issue, in political and business circles, before the biggest head offices all disappear.

The trailblazing Mr. Linton, who created what's now an $18billion company out of an abandoned Hershey chocolate factory, lost his job because his visionary approach for Canopy Growth Corp. didn't fit with the predictable, quarter-by-quarter profits demanded by Constellation Brands Inc. CEO chief executive Bill Newlands, a booze-industry veteran and Harvard Business School grad.

Constellation dropped $5-billion last August to gain effective control of Canopy.

What Mr. Newlands wants, he gets.

Moving down a list of Canada's largest cannabis companies, you find Nanaimo, B.C.-based Tilray is run by Seattle-based CEO Brendan Kennedy. Toronto's Cronos Group Inc. is headed by New York-based Mike Gorenstein. And the interim CEO at Leamington, Ont.'s Aphria Inc. is Irwin Simon, another New Yorker, although he was born in Glace Bay, N.S. Of the 10 largest North American cannabis companies, only Aurora Cannabis Inc. in Edmonton and Gatineau-based Hexo Corp. have homegrown CEOs.

Mr. Linton's departure is similar to what has played out at many startups that get sold to multinational companies. Mr. Linton said Wednesday in an interview with The Globe and Mail that he expected taking Constellation's cash would likely mean the end of his six-year run at Canopy and its predecessor company. "I detach my personal desire from my desires for the company," Mr. Linton said. "Even when we brought that $5-billion in, I knew, from that change of structure, there would likely be implications for management, but it was the right thing to do for the company."

The cultural issue that Canadian leaders need to recognize is our entrepreneurs tend to sell successful startups at a relatively early stage, compared with jurisdictions such as the U.S. and Asia. It already happened in the beer and spirits industries, where leading domestic players such as Molson, Labatt and Seagram have long been controlled by foreigners. The trend, now happening even more rapidly in the cannabis sector, cuts into the potential future prosperity of this country.

According to all sorts of academic research - including a study last year from the Washington-based Brookings Institution and the Martin Prosperity Institute at the University of Toronto's Rotman School of Business - scaling up successful domestic businesses is essential to creating wealth and producing the next generation of corporate leaders. Canadians need to do better at turning their own companies into global champions. Silicon Valley generates enormous wealth out of a vibrant tech community. Why can't Leamington or Nanaimo aspire to do the same in cannabis?

Canadian cannabis companies were created by government policy. They sprang to life not only because pot was legalized, but because federal and provincial regulators granted the licences needed to grow and distribute their products - and local capital markets were receptive to financing them. There's no obvious public good that would come from ensuring control of the sector remains in Canada, as there is with banks or telecom companies.

But CEOs, boards and domestic politicians should be asking if the country is best served by a laissez-faire approach to cannabis that created vibrant, valuable businesses following legalization in 2018, then quickly began handing over control of the sector.

Associated Graphic

Bruce Linton's departure from Canopy Growth is similar to what has played out at many startups that get sold to multinational companies. Mr. Linton says he suspected his time was at an end: 'I detach my personal desire from my desires for the company.'

THE CANADIAN PRESS


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Losses, rising tensions led to Linton's firing
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Constellation's push for more influence over cannabis producer led to clashes over direction of company, sources say
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By JAMESON BERKOW, TIM KILADZE, ANDREW WILLIS
  
  

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Thursday, July 4, 2019 – Page B1

Bruce Linton, the co-founder of Canopy Growth Corp. and one of the cannabis industry's most prominent executives, is out of a job after months of poor financial results and rising tensions with the company's new owner.

Canopy announced early Wednesday that Mr. Linton was no longer a cochief executive officer or board member. Mr. Linton confirmed in an interview he'd been terminated. Mark Zekulin will now lead the company on an interim basis as it searches for a new CEO.

Mr. Linton charted an aggressive course of acquisitions on the path to turning the grower based in Smiths Falls, Ont., into one of the world's largest pot companies. He said his ouster came at the hands of the leadership of New York-based Constellation Brands Inc., which gained control of Canopy after a $5-billion investment last summer.

Since that deal, Constellation has sought to exert more influence over the cannabis producer, leading to clashes between Constellation CEO Bill Newlands and Mr. Linton over the direction of the company, sources familiar with the matter said. The sources were granted anonymity because they were not authorized to speak publicly.

For Canopy, the firing marks a new chapter in the company's evolution from a medical marijuana startup to a world leader in the cannabis sector.

For the industry, the move highlights how expectations have shifted in the months since recreational marijuana was legalized last October. Canadian cannabis companies were once judged largely on their aspirations: how much weed they promised to one day produce or how many countries with whom they had signed export licences. Today, institutional backers and strategic partners have bigger seats at the table - and they want profits.

Canopy's mounting losses took their toll on the company's shares. It lost $323-million in its most recent quarter and its stock price has fallen 26 per cent since late April. And last week, Mr. Newlands voiced his displeasure with Canopy's results on a conference call.

But Mr. Linton, who had led Canopy since its founding five years ago, said it was a phone call last Friday that made him believe his days atop the company might be numbered.

Hours before the Canada Day long weekend, Mr. Linton got a call from Constellation requesting a board meeting.

"Instead of having it on the phone that day, they wanted to have it in person," Mr.Linton said in an interview. "That caused my spidey-sense to tingle."

At the meeting four days later, he was fired from the company he built into an $18-billion juggernaut.

For a serial entrepreneur, it was a familiar scene. "It was not the first time I've been fired as a founder," he said. Once the meeting starts, "you know exactly what you've walked into."

Mr. Linton is not just another CEO. He spent years as the most public face of Canada's legal cannabis industry, proudly wearing cannabis T-shirts on television, expounding on the promise of pot as a business and an investment. He helped draw billions of dollars of capital to the industry as Canopy earned a reputation as a mature force in an immature sector. Everyone seemed to want a piece of Canopy - including Constellation.

But eventually Constellation's Mr. Newlands and Canopy's other investors were bound to judge the company based on its bottom line.

"The time has come when it is critical for cannabis companies to show that you can run a profitable business and you can do it in a manner that involves investing wisely to build your brands," OrganiGram Holdings CEO Greg Engel said of the shifting expectations.

"Investors are looking for more traditional metrics and numbers that matter - Is a company cash-flow positive? What is their gross margin? What is their adjusted EBITDA [earnings before interest, taxes, depreciation and amortization] margin?" Canopy's fourth-quarter loss, announced last month, was four times larger than analysts' expectations.

"The magnitude of losses for [Canopy] has expanded far more than we had expected, and while we commend Linton for his vision in establishing the world's leading cannabis company, we believe new leadership will be a welcome change," Cowen analyst Vivien Azer wrote in a note to clients Wednesday after the exit was made public.

Canopy had negative EBITDA of $257million in fiscal 2019 and an EBITDA loss of $36-million in fiscal 2018.

"The departure of Mr. Linton is indicative of the fact that the losses Canopy is experiencing are getting out of control," Macquarie analyst Caroline Levy wrote in a note to clients, adding losses are projected "to continue for at least the next three years as Canopy invests in Canada, the U.S.

and new markets around the world."

In the months leading up to Constellation's first investment in Canopy in 2017, a deal worth $245-million, Constellation spoke glowingly of Canopy and its management team. "Our view going in after our assessment was that Canopy was the best player. They had the best management, best science, largest market share and a strong management team," Mr. Newlands told The Globe in January.

Half a year later, Mr. Newlands used a very different tone when speaking about Canopy on Constellation's quarterly conference call last week. While Mr. Newlands said he is still optimistic about cannabis, he added, "We were not pleased with Canopy's recent reported year-end results."

Mr. Newlands, said he still strongly supports Canopy, but threw in a condition: The support is for a "more focused, longterm strategy."

Constellation declined to comment for this story.

Under Mr. Linton, Canopy was an early mover when Canada announced plans to legalize recreational marijuana in 2015. In the span of a few years, scores of rival cannabis companies emerged, leading to fears that Canada would be oversaturated with cannabis production. To pivot, the largest players started looking abroad, particularly in Europe where some countries legalized medical marijuana. Canopy now operates in 16 countries.

In April, Canopy said it would pay US$300-million to secure the right to buy Acreage Holdings Inc. should federal marijuana laws change in the United States. Canopy also agreed to pay US$3.4-billion for Acreage in the future, based on where its own shares were trading when the sale is triggered by legalization in the U.S.

While Constellation has voiced its support for the Acreage transaction, which was approved by shareholders last month, Mr. Newlands has signalled he is less interested in empire building and more into making money off cannabis in the near future.

Constellation said it will search for a new CEO for Canopy and that it will assess both internal and external candidates. Canopy's shares dropped sharply in early morning trading Wednesday but recovered throughout the day and closed up 2 per cent at $53.52.

Mr. Linton, meanwhile, expressed optimism that he will land at another company, likely outside of Canada. Mr. Linton said he has a non-compete clause with Canopy that prevents him working for a rival Canadian cannabis company for a period of time. Even if he didn't, he said, he would probably look abroad.

"When we were building Canopy my job was to never mention any of [our competitors'] names and try to run over them if we ever saw them anywhere," he said.

No matter where he lands, Mr. Linton is giving up one of his biggest roles. "The role of de-facto spokesperson will need to be actively filled by others," he said, "because I think I probably did more media work than the rest of the sector combined."

CANOPY GROWTH (WEED) CLOSE: $53.52, UP $1.03

Associated Graphic

Bruce Linton spent years as the most public face of Canada's legal cannabis industry, expounding on the promise of pot as a business and an investment.

FRED LUM/THE GLOBE AND MAIL


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Callidus warns of losses amid talks to take company private
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By ANDREW WILLIS
  
  

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Wednesday, July 3, 2019 – Page B1

TORONTO -- Callidus Capital Corp. expects further losses on businesses it owns or loaned money to, a downbeat outlook for the lending company controlled by Newton Glassman as it continues to deal with an offer to take the company private.

Callidus president David Reese told shareholders at Tuesday's annual meeting in Toronto the company is struggling to rebuild five businesses it took over after they failed to pay back loans, and "may have to sell at a loss."

Mr. Reese also said Callidus has nine loans outstanding and "we anticipate we will have some loan loss provisions, as we still have some problems in our portfolio."

Callidus typically lends to industrial businesses that cannot get credit from banks and other traditional sources of credit because of financial or business difficulties. It sometimes ends up owning companies that fail to repay those loans, and will attempt to restructure and sell them to recoup some money.

The company has not made a new loan in the past 12 months and Mr. Reese said strong competition from rivals lenders and Callidus's poor financial performance are impediments to winning new business.

Publicly traded Callidus, which is 72 per cent owned by private equity fund Catalyst Capital Group Inc., lost $24.7million in the first quarter, following on a loss of $182.5-million in 2018 and a $218.5-million loss in 2017.

The company has lost money for 10 consecutive quarters and shareholders' equity - an important measure for a financial-services firm - has largely evaporated in that time, declining from $437-million at the end of 2016 to $36million as of March 31.

For the second consecutive year, Mr.Glassman, the chairman and chief executive of Callidus, did not attend the company's annual meeting for what Mr.

Reese said were "personal health reasons." When Callidus shareholders asked when Mr. Glassman would return to full-time work, Mr. Reese said there is "no firm date."

But Mr. Reese said he does see Mr. Glassman "on a fairly regular basis" at the company's offices, which it shares with Catalyst, and that Mr. Glassman remains active in the company as chair of the Callidus credit committee.

Catalyst took its distressed lending unit public at $14 a share in 2014 and its stock price hit $24 later that year. In 2017, with the stock trading around the initial public offering price, Mr. Glassman repeatedly held out the prospect of taking the company private at $18 to $22 a share, based on a valuation from National Bank Financial. Callidus stock closed Tuesday at 51 cents, giving the company a $30-million market capitalization.

Last December, Bahamas-based Braslyn Ltd. offered to buy Callidus's publicly held shares for $2 each, and Callidus struck a committee of independent directors to deal with the unsolicited bid.

On Tuesday, Mr. Reese told shareholders that negotiations with Braslyn are continuing and declined to provide a timeline on the talks. Braslyn is owned by British billionaire Joe Lewis and holds a 14.5-per-cent stake in Callidus.

At Tuesday's meeting, Callidus shareholders approved the sale of slot-machine maker Bluberi Gaming Canada Inc. to Catalyst. In return, Catalyst forgave $92.5-million of debt the fund had extended to Callidus. Accounting firm BDO Canada LLP provided a favourable fairness opinion on the transaction.

Two years ago, Callidus highlighted the profit it stood to make on the sale of Blueberi, based in part on the potential sale of up to 7,000 of the company's slot machines to Gateway Casinos & Entertainment Ltd., a company also controlled by Catalyst. Gateway filed for an IPO in November, 2018, with Morgan Stanley leading the transaction.

Catalyst's provisions for loan losses totalled $320-million at the end of 2018, including $199.5-million for impaired loans to companies in the energy sector, mainly due to problems with an unnamed lender with operations in South America. At the time, analysts said the troubled borrower is Oklahoma-based Horizontal Well Drillers, which held contracts to do work in Venezuela.

At Tuesday's meeting, shareholders asked Mr. Reese for an update on Callidus's South American exposure, and were told that while there were no new details on the loans, drilling equipment earmarked for the contract never left the United States.

Callidus paid Mr. Reese $2.9-million in 2018 and $4.7-million in 2017.


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For Raptors co-owner, another triumph
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Larry Tanenbaum's company sells stake in ONroute chain of highway service centres to a pair of private-equity funds and proves public-private partnerships can work
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By ANDREW WILLIS
  
  

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Tuesday, July 2, 2019 – Page B1

Larry Tanenbaum had more than an NBA championship to celebrate this spring. The private equity investor and co-owner of the Toronto Raptors just made a significant score with the sale of Ontario's 23 ONroute service centres, and proved that public-private partnerships can work.

Mr. Tanenbaum's company, Kilmer Van Nostrand Co. Ltd., and a unit of Italian catering company Autogrill Group sold their joint interest in the Highway 400 and 401 pit stops to a pair of private equity funds, Britain-based Arjun Infrastructure Partners Ltd. and Toronto-based Fengate Asset Management Ltd.

While Kilmer is private and does not release financial results, Autogrill is a public company and disclosed it received $255-million for its ONroute stake. Kilmer will pocket slightly more on the deal, as the company also sold a 50-per-cent stake in the chain's gas stations, which it co-owned with Canadian Tire Corp. Ltd.

Kilmer, Autogrill and Canadian Tire won a 50-year lease on the ONroute stations from the Ontario government in 2010, beating out three rival bidders.

The three private-sector partners and the government invested approximately $300-million in complete renovations for the 23 sites, which the province previously leased to oil companies. Kilmer and Autogrill likely earned a fourto five-fold return on their investment over nine years.

However, Kilmer vice-chairman Ken Tanenbaum - the eldest son of Larry Tanenbaum, chairman of Maple Leaf Sports and Entertainment Ltd. - said the profit reflects the risks in the investment, which was structured by the Ontario government during the global financial crisis, along with strong interest in infrastructure assets from institutional investors such as Arjun and Fengate.

"The ONroute chain was structured as a revenue-risk partnership with the province. If we didn't sell more burgers and coffee and pump more gas, we weren't going to make money on this project," said Ken Tanenbaum, who has been running Kilmer's infrastructure and real estate business since 2006 after working at LafargeHolcim, the global building materials company.

Revenue-risk projects see private-sector companies such as Kilmer and Autogrill form a partnership with a government and co-invest in a project, with the corporate players only making a profit if they can increase sales by attracting more customers. The approach is relatively common in jurisdictions such as Australia and Britain, and is becoming more accepted in Ontario as debtstrapped governments look at new ways to fund infrastructure.

At ONroute, the province persuaded Kilmer, Autogrill and Canadian Tire to pay for soil remediation and bring the sites up to new environmental standards, as many of the gasoline storage tanks were installed in the 1950s and needed to be replaced. Mr. Tanenbaum said the service centres are also run to play a social purpose, for which the companies shoulder extra costs: The stops are open 24 hours a day, all year, and provide a place for travellers to wait out storms and road closings.

The ONroute chain is one of three revenue risk projects Kilmer has completed with the provincial government. The Torontobased company teamed up with real estate developer Dream Unlimited Corp. to build the athletes' village for the Pan American Games in 2015, which was subsequently converted into condominiums. Kilmer and Dream also joined forces to build 1,500 units of rental housing, including more than 400 units of affordable units, in downtown Toronto's West Don Lands. Mr. Tanenbaum said, "If we can't lease these units, we don't make money on these projects."

Kilmer and Autogrill decided to shop their stakes in the ONroute chain when bankers at CIBC World Markets reported strong interest in the business from institutional investors. "ONroute is what's known as infrastructureplus, as there's a long-term concession, with upside potential that comes from improving the services," Mr. Tanenbaum said.

Incoming ONroute owner Arjun is making its first North American investment, but runs U.K. service station operator Welcome Break. The British chain features hotels at many of its 27 rest stops, along with fish and chip outlets, and serves 85 million customers annually. ONroute currently welcomes approximately 40 million drivers each year, and the average visit is approximately 20 minutes.

This is Kilmer's second largest infrastructure sale this year. The firm was also part of a consortium that agreed to sell the Billy Bishop Toronto City Airport terminal in January to a group led by New York-based JPMorgan Asset Management. Kilmer and its partners acquired the downtown terminal in 2015 for an estimated $700-million.

Arjun and Fengate looked to investment bank Evercore for advice on the ONroute acquisition, with legal work done by Blake, Cassels & Graydon LLP and British firm White & Case LLP.

Associated Graphic

Larry Tanenbaum, centre, holds the Larry O'Brien NBA Championship Trophy with Toronto Raptors player Norman Powell, left, and BCE CEO George Cope after beating the Golden State Warriors last month.

LARRY W. SMITH/EPA

The ONroute chain - a series of highway service centres located in Ontario - is one of three revenue-risk projects that Larry Tanenbaum's company Kilmer Van Nostrand has completed with the provincial government.

QUADRANGLE ARCHITECTS LTD.


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Peloton Capital takes stake in dental chain in first major deal
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By ANDREW WILLIS
  
  

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Thursday, June 27, 2019 – Page B2

Private equity fund Peloton Capital Management is investing $75-million in national chain 123Dentist Inc., the latest financial player to target dentistry as an industry that's ripe for consolidation.

Peloton, launched last November by veterans of the Ontario Teachers' Pension Plan and entrepreneur Stephen Smith, is expected to announce its first deal on Thursday, buying a co-control position in a business with 70 dental practices in five provinces. 123Dentist is the country's second largest chain and is currently owned by its employees, including Vancouver-based chief executive Amin Shivji, a dentist who opened his first office in 1993 and still sees patients one to two days a week.

There are approximately 15,000 dental offices across Canada and 123Dentist is one of several deep-pocketed services offering to partner with dentists, typically helping recent graduates to build their business or older-practice owners to manage succession. 123Dentist's business model allows dentists to maintain minority ownership in their practice, and those who have signed up to date are typically between the ages of 40 and 45.

"A successful dentist focuses on patients, and my vision has always been to support that dentist with an excellent business service," Dr. Shivji said. He said 123Dentist considered offers from five private equity firms before settling on Peloton. With the fund's backing, Dr. Shivji expects to expand 123Dentist by 30 to 40 new offices each year, but he said: "The key is making sure we grow at a pace where we keep the culture, and keep our people happy."

Peloton co-founders and managing partners Mike Murray and Steve Faraone previously invested in one of the largest U.S. chains, Heartland Dental, while at Teachers. Heartland more than doubled annual sales to US$1.3-billion in the five years that the Teachers' fund owned the business, expanding to 840 offices from 400. Teachers sold the majority stake in Heartland last year to New York-based Kohlberg Kravis Roberts & Co. LP.

"Compared to the U.S. market, the dental market in Canada is fragmented, and we see 123Dentist as an important option for any dentist, at any stage," Mr. Faraone said. He said offering dentists continued ownership in their practices was part of Heartland's successful business model.

The largest domestic player in this sector is Dental Corp. of Canada Holdings Inc., which was founded in 2011 and now has 350 offices.

Typically, Dental Corp. owns 100 per cent of a dental practice. Last year, a consortium made up of U.S. private equity fund L Catterton and Toronto-based Imperial Capital Group Ltd. and OPTrust took an equity stake in Toronto-based Dental Corp. to help fund growth.

As part of the Peloton investment, Heartland Dental chief executive Pat Bauer will join the 123Dentist's board of directors. Investment bank RBC Dominion Securities advised Peloton Capital on the transaction. Mr. Faraone said a banker introduced Peloton to the dental business earlier this year, just as Dr. Shivji kicked off a search for growth capital.

123Dentist will use part of the money from Peloton to refinance the company's credit lines.

Peloton's founders are all keen cyclists, and chose their name because a group or peloton of riders is 40 per cent more efficient than someone cycling on their own. The firm has raised $330-million to date for its first fund, and is targeting $500-million. Backers include financial institutions and family offices, with Mr. Smith, the chairman and CEO of mortgage lender First National Financial LP, putting up a minimum of $150-million.

Peloton plans to make $25-million to $75-million initial commitments to mid-sized, profitable companies and its first fund is expected to invest in seven to 10 businesses. The fund recently landed veteran consumer products executive and ardent cyclist Irene Chang Britt as a member of its advisory board. She was previously chief strategy officer at Campbell Soup Co. and also worked at Kraft Foods and Kimberly-Clark. Peloton also recently hired former West Face Capital executive Nora Nestor as its chief financial officer and RBC Dominion Securities veteran Mike Scarola as a Peloton partner. Mr. Scarola represented Canada in the 2004 Athens Olympics in canoeing; he now spends leisure time mountain biking.


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Catalyst Capital targets HBC buyout bid
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Fund manager acquires minority stake in retailer, joining list of institutional investors and analysts opposed to $1-billion offer
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By ANDREW WILLIS
  
  

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Tuesday, June 25, 2019 – Page B1

Fund manager Catalyst Capital Group Inc. acquired a minority stake in Hudson's Bay Co. last week, and plans to oppose a $1billion buyout offer for the retailer led by the company's executive chairman, Richard Baker.

Catalyst, a Toronto-based fund controlled by financier Newton Glassman, snapped up a portion of a 10-per-cent stake in HBC from the Ontario Teachers' Pension Plan Thursday, according to a Catalyst spokesperson. Catalyst is known for diving into distressed investments, and frequently uses litigation as part of its business strategy.

The spokesperson said Catalyst will argue that the current $9.45-a-share offer for HBC from Mr. Baker and his partners undervalues the company's real estate and the potential for a turnaround at its department stores, which include its namesake chain, Lord & Taylor and Saks Fifth Avenue. The fund will make its pitch to a committee of HBC's independent directors, who are currently assessing the buyout offer. Catalyst's thesis is that HBC, which was founded in 1670, can use technology more effectively to win a larger share of the online shopping market.

The fund controls publicly traded distressed-lender Callidus Capital Corp., which it took public five years ago at $14 a share and now trades at 46 cents.

However, Catalyst partner Gabriel de Alba, who is responsible for the HBC investment, successfully oversaw the restructuring of European real estate company Geneba Properties NV, which owned warehouses and light industrial buildings in Germany and the Netherlands. Catalyst invested $101-million in Geneba in 2012 and made a 19.5-per-cent annualized return when it sold the company in 2017.

Mr. Baker's group declined to comment, and an HBC spokeswoman said officials weren't available to comment Monday on Catalyst's investment. Catalyst's Mr.de Alba was not available for comment, and Mr. Glassman, Catalyst's chief executive, is currently on a medical leave.

Catalyst joins a growing list of institutional investors and analysts opposed to selling HBC at the price Mr. Baker is offering.

Last week, Stamford, Conn.based Land & Buildings Investment Management LLC slammed Mr. Baker's bid as "woefully inadequate." Land & Buildings is asking the company to explore all "strategic alternatives," including a sale. Jonathan Litt, founder of Land & Buildings, said in a letter to HBC's special committee that the offer should be raised to $18 a share.

Toronto-based HBC announced financial results after Mr. Baker tabled his offer in early June, and reported 2.4 per cent growth in sales at Saks and a $275million quarterly profit, due in part to a $817-million gain on the sale of Lord & Taylor's New York flagship building.

CIBC World Markets Inc. analyst Mark Petrie reviewed the chain's performance and said in a report that HBC owns iconic properties and "with an improving retail business under competent leadership, we believe this is not adequately reflected in the $9.45 offer." He said: "In our opinion, a range of $10.25-$11.25/share would more appropriately reflect today's value."

To take HBC private, Mr. Baker's group needs approval from a majority of the company's minority shareholders. Mr. Baker is working with Rhone Capital LLC, WeWork Property Advisors, Hanover Investments (Luxembourg) SA and Abrams Capital Management LP, and the group collectively owns 57 per cent of HBC.

HBC shares closed Monday at $9.81 on the Toronto Stock Exchange, up 8 cents. The stock has mostly traded above Mr. Baker's offer since shortly after the bid was announced, a sign for some investors that the buyout offer will be sweetened.

Back in January, the Ontario Teachers' fund agreed to sell an 18-million-share stake in HBC to Mr. Baker's group for $9.45 a share. The transaction failed to close as scheduled this month and the pension plan subsequently sold its position into the public markets in trades done last Thursday by TD Securities Inc.

HUDSON'S BAY (HBC) CLOSE: $9.81, UP 8¢

Associated Graphic

Catalyst is the latest to join a growing list of institutional investors and analysts opposed to selling HBC at the $9.45-a-share offer put forward by executive chairman Richard Baker.

FRED LUM/THE GLOBE AND MAIL


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Stronach Group bans Hall of Fame trainer after horse dies at race track
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Monday, June 24, 2019 – Page A1

The Stronach Group banned a Hall of Fame horse trainer after a thoroughbred died at its Santa Anita race track, the 30th fatality this season at a facility that has become a battleground for the future of the sport.

Jerry Hollendorfer, whose horses have won more than 7,600 races during a fivedecade career, is no longer welcome at the storied track in Southern California owned by Toronto's Stronach family. He was banned after American Currency, a fouryear-old thoroughbred, was euthanized after being injured during a training run. It was the fourth horse trained by Mr. Hollendorfer to die at Santa Anita this season.

Belinda Stronach, president and chair of The Stronach Group (TSG), rolled out a series of initiatives over the past two years aimed at making racing safer for horses.

This includes cutting medication given to horses, such as drugs that mask pain during training and races. In a press release on Saturday, TSG said: "Individuals who do not embrace the new rules and safety measures that put horse and rider safety above all else, will have no place at any Stronach Group racetrack."

TSG, a private company, generated US$1.1-billion in revenues last year from racing and related gambling and real estate ventures, but increasing opposition to racing is putting the future of the industry in doubt.

This season's fatalities at Santa Anita have prompted animal-welfare groups, California's horse racing regulator and Governor Gavin Newsom to call for a halt to racing at the track. TSG, with support from horse owners and trainers, has refused to shut down the storied site.

"I've started 33,500 horses in my career. I've never been suspended," Mr. Hollendorfer said on the weekend in a telephone interview with Reuters. He said: "I thought that was a little bit premature and extreme, but I'll probably have to step away from racing here for a while."

In addition to Santa Anita and the Golden Gate Fields facility in California, TSG owns racetracks in Florida and Maryland, where its Pimlico track is the site of the annual Preakness Stakes, part of racing's signature Triple Crown series of races.

Santa Anita staged 29 races featuring more than 200 horses on Friday, Saturday and Sunday, then closed for the summer. The track, which played host its first race in 1904, is scheduled to reopen in September and host the Breeders' Cup World Championship event in November.

Mr. Hollendorfer is the fourth trainer to be banned at Santa Anita this season and by far the highest-profile industry figure to be subject to sanctions. TSG said in a news release: "We regret that Mr. Hollendorfer's record in recent months at both Santa Anita and Golden Gate Fields has become increasingly challenging and does not match the level of safety and accountability we demand."

Over the course of his career, Mr. Hollendorfer has fielded horses that won 7,617 races, the third-most wins of all time among trainers. His horses have claimed approximately US$200-million in prize money. He was inducted into the National Museum of Racing and Hall of Fame in 2011.

Race-horse fatalities at Santa Anita are playing into the continuing court battle for control of TSG between company founder Frank Stronach and his daughter, Belinda. In recent weeks, Mr. Stronach, the 86-year-old former chief executive of auto-parts company Magna International Inc., blamed fatalities at the track on poor management at TSG, and said his daughter planned to sell the race tracks. Ms. Stronach denied these allegations in a notice of liable letter to her father.

The Stronach family is fighting for control of a family fortune worth an estimated $1.2-billion. Along with the racetracks, TSG owns real estate, a media and gambling company and an agricultural business. Mr. Stronach handed control of TSG to his daughter in 2013 when he ran for political office in his native Austria. He filed a lawsuit last November in a bid to win back the company, and more than $500million in damages, and the case is now winding its way through the courts.

On the weekend, animal-rights groups continued to call for an end to racing and said banning Mr. Hollendorfer does not change the nature of the sport. Heather Wilson, the West Coast co-ordinator for anti-racing website Horseracing Wrongs, told California newspaper The Mercury News: "They are making Hollendorfer the sacrificial lamb. It's not the trainer, it's the industry." With a report from Reuters


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BLOOD ON THE TRACK
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By TAVIA GRANT, ANDREW WILLIS
  
  

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Saturday, June 22, 2019 – Page B1

The horse-racing industry is at a crisis point.

A storied American track is at the centre of the storm.

And an epic feud in the Stronach family isn't helping.

Tavia Grant and Andrew Willis report from Arcadia, Calif., and Toronto B5


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Horse racing faces an uncertain future after a rash of animal deaths in recent years - and the Stronachs are caught in the middle
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By TAVIA GRANT, ANDREW WILLIS
  
  

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Saturday, June 22, 2019 – Page B5

ARCADIA, CALIF. TORONTO -- IIt's 8:30 am at Clockers' Corner, the bustling coffee spot at the top of the stretch at Santa Anita Park, where jockeys and trainers, agents, owners and racing fans gather to watch the morning workouts.

Dr. Dionne Benson, chief veterinary officer here, sits in the stands nearby, fielding questions from a reporter. But her eyes never leave the track. She scans the thoroughbreds galloping below, looking for bobbing heads or uneven hip action - any hints of trouble.

She's not the only one watching anxiously. Santa Anita, northeast of Los Angeles, is one of the world's most beautiful and storied racetracks. It's home to legends in racing, from John Henry to American Pharoah, who made history in 2015 as the first Triple Crown winner in nearly four decades. And it's having a terrible year. Twenty-nine horses have died racing or in training at Santa Anita since late December, collapsed from a heart attack or euthanized after broken legs or shoulder or pelvic injuries.

That's not even a particularly high number for the track. Fifty-four horses died racing or training here in 2017; 59 in 2012. But a stunning 23 deaths in the first few months of 2019 - among them the famed Battle of Midway, winner of the Breeders' Cup dirt mile, who died in training, and Princess Lili B, who broke her legs during training (captured, in horrific detail, by a local TV station filming at the time) - brought a blast of media attention and calls for the track to shut down.

It did close for much of March to regroup and check the track's surface. Two days after it reopened, another horse died: Arms Runner, a five-year-old gelding, injured his right front leg in a race, fell and was euthanized. At least three more horses have died this month. In an unprecedented move, the California Horse Racing Board (CHRB), the state regulator, called in early June for the track to suspend operations, as did California Governor Gavin Newsom. But the CHRB does not have the power to shut down a track without a public meeting with 10 days notice, and Santa Anita refused to stop races. It remains open, controversially; Sunday is the last day of racing before a summer break.

After that, says Dr. Benson, "we're going to look at everything. ... And if there is anything that we can do better that will make horses safer, it is on the table, open for discussion. We want this to be the safest racetrack in the world, not just America, for horses," she adds, before heading down to her next interview with a TV crew.

There is a lot at stake - thousands of local jobs, the future of the sport at one of America's most hallowed tracks, and perhaps more than that. The racing industry has been struggling from declining attendance, attacks by animal-rights activists and an increase in scrutiny of the toll it takes on the horses. Last year, 493 horses died while racing at North American racetracks, according to data from the Jockey Club - an average of about 10 fatalities a week. Between 2009 and last year, 6,134 horses suffered fatal injuries. (Toronto's Woodbine Racetrack, site of the Queen's Plate next weekend, has a fatality rate lower then the Jockey Club's average; even so, 108 horses have died in races over the past decade.) And these data underestimate the toll, as not all tracks report fatalities, and the national numbers don't include deaths in morning training.

Race fatalities are a long-standing part of the centuries-old sport - but many say horse racing is now in crisis, with Santa Anita at the epicentre. The Globe and Mail spent a week speaking with dozens of trainers, owners, jockeys, exercise riders, bettors, company officials and ground staff about the track, along with animal-welfare advocates and area politicians. "We're all on pins and needles because we don't want to see it happen again," said Bob Baffert, the renowned trainer of two Triple Crown winners and five Kentucky Derby winners, in an hour-long interview at his stables by the track. "We're under a magnifying glass right now ... everyone's nervous."

No one knows this better than Belinda Stronach, president and chair of The Stronach Group (TSG), which owns Santa Anita and six other iconic racetracks, including Gulfstream near Miami and Pimlico in Baltimore, home of the Preakness. Ms. Stronach is arguably the second-most prominent Canadian in the world of horse racing; the first, of course, would be her father, Frank Stronach. The family has made large investments in the sport, starting in the early 1960s; the Stronachs now find themselves at the centre of its fight for survival.

And that fight comes as father and daughter are locked in a bitter legal battle over an estimated $1.2-billion fortune, much of which is tied up in horse racing and related gambling and real estate businesses.

Mr. Stronach, the 86-year-old founder of auto-parts company Magna International Inc., handed the reins of the family company to his now-53-year-old daughter five years ago in order to run for political office in his native Austria. After his political career fizzled, Mr. Stronach turned his attention to new business ambitions, including changing the way Americans eat by acquiring a massive grass-feed beef ranch in central Florida and launching a national grocery and restaurant chain.

The ventures lost vast sums of money, and Ms. Stronach cut off most funding for her father's projects in 2016, claiming the red ink ran to more than $800-million. They've been fighting for control of TSG ever since.

In this family feud, the death of a horse becomes a club Frank Stronach uses to pound away at his daughter's credibility. At a news conference near Santa Anita in April and in subsequent media interviews, Mr.

Stronach linked race-course fatalities to poor management at TSG and said his daughter and her perceived allies, such as TSG chief executive Alon Ossip, are intent on selling the race tracks, which could be worth billions of dollars to real estate developers. With cameras rolling, Mr.

Stronach said: "They are making a mess. It seems to me they have done it on purpose there, to kill racing."

Ms. Stronach has responded with a notice of libel from her lawyers, asking her father for an "unequivocal apology and retraction," for alleging that she "deliberately, negligently or otherwise caused the horse fatalities at Santa Anita." In court filings and in conversation, Ms. Stronach says Mr. Ossip, a long-time adviser to her father, stepped back from an active role at the family company in 2017 at Frank Stronach's request and has no input on corporate decisions.

Undaunted, Mr. Stronach emerged Thursday in California at a CHRB meeting to again complain about being frozen out of the family business, and make his case for safer race tracks. He told the crowd: "We have to prove to the public that horsemen do care for the horses." Mr.

Stronach's vision of the future would see the racetracks placed in a trust, controlled by horse owners and trainers, while TSG would retain and develop any land that wasn't needed for racing. The ponies would be cared for under what the former Magna CEO calls a Racing Charter of Rights that guarantees horses eight weeks of vacation a year, plus a retirement funded by setting aside a small percentage of every bet.

(Through his lawyers, Mr. Stronach declined to comment for this story.) Racing is as much, or more, of Frank Stronach's legacy as auto parts are, and friends say he is deeply hurt by being excluded from any formal role in a sport he cherishes.

But Ms. Stronach is running TSG, and has spent much of the past three months in California, dealing with the problems at Santa Anita.

In a 90-minute interview with The Globe and Mail, she laid out a series of safety initiatives that TSG is championing, in conjunction with trainers, jockeys, breeders, rival track owners and state and federal governments. "Historic change is taking place in racing," she said. She also defended her decision to keep the track open through this weekend, the end of the spring season. "If we closed the track last week, I believe it would have been the beginning of the end of horse racing in California," she said.

And she talked about plans to rejuvenate the business, to modernize the experience of a day at the races and make it relevant to audiences that have so many other ways to spend their entertainment dollar. TSG, she said, is committed to horse racing. "I have looked my father in the eye, on numerous occasions, and said, 'Dad, we are not selling the race tracks.' " T T The setting for Santa Anita Park is undeniably stunning. The palmstudded San Gabriel Mountains provide a sweeping panorama for the 85-year-old track. It's steeped in history; in 1940, Seabiscuit won the Santa Anita Handicap; in 2009, Zenyatta became the first mare to win the Breeders' Cup Classic. Bing Crosby, Marlene Dietrich and Spencer Tracy turned up to watch races here. (Though it was not all glamour and celebration; in 1942, it was a temporary detention camp for 19,000 Japanese Americans on their way to internment camps, housing thousands of people in converted horse stalls.)

The Art Deco façade, massive grandstand and vast parking lots were built for a bygone era; attendance has dwindled from peaks of 80,000 or more to 10,000 on average this season, as many who play the horses now place their bets remotely. (Ninety per cent of the money wagered on Santa Anita races is bet off-site.) Even on a lovely Friday afternoon, with free admission and US$2 beer, the stands are nearly empty.

Headlines of horse deaths and protesters outside the gates are giving potential patrons more reasons to stay away. Hector Molina sits in the stands on a Friday afternoon, some betting chits in hand.

Asked if he's a regular, he proudly pulls out his official licence, showing he's a former exercise rider - has been since he was an eight-year-old boy in Mendoza, Argentina. Now 80, he still comes to the track most days to watch. He thinks there are several factors at play in the horse deaths: "Many new people are coming, they gallop the horse and don't understand when its foot is sore," he says.

Theories abound for why so many horses have died. Initially it was thought that unusually heavy rains were affecting the surface of the dirt track. But the rain stopped, and the horses kept dying. Some blamed the practice of running horses with pre-existing medical conditions, the overuse of medication that masks pain, trainers who forced a sore horse to run, track management geared at maximizing profits and horses made to run year round.

Some think it's bad luck, a statistical anomaly, a curse on the track; animal-rights advocates say it's just a normal, hidden part of racing.

The Los Angeles County District Attorney's office has started an investigation into the horse deaths. It will examine whether "unlawful conduct or conditions" have affected the safety of horses at the track; the investigation is ongoing, and the DA's office declined to comment for this story. The CHRB is also investigating.

The deaths have raised questions about who is responsible for horse safety, from the trainers and owners to the racetrack operators and state racing regulators. Outside oversight is scant, and rules and transparency differ from state to state.

Senator Dianne Feinstein noted this month that other countries have national standards on medication use, and fewer fatalities. "We don't accept that there will be athlete fatalities in other sports; it should be no different for horse racing." Governor Newsom said last week he is troubled by the horse deaths and that "enough is enough."

About 1,800 horses run at Santa Anita over the course of the season, and more than 1,200 people work at the track. Spend a week at Clockers' Corner and you'll hear the same message, from jockeys and exercise riders to grooms, hot walkers, trainers and vets: We love the horses. We care for our horses. The do-gooder animal rights people have no clue about this sport. Thousands of jobs are at stake.

Proportionately, few horses break down, although inevitably, some will. And a lot of other sports have serious injuries too - look at basketball's Golden State Warriors in the NBA Finals. Do we close down the National Football League because of concussions?

(Though we don't euthanize injured football players.)

"As trainers ... we've learned from this, and we need to do a better job of policing ourselves," Mr. Baffert says. "If you have a horse that doesn't look 100 per cent, don't even take the chance of sending them out there."

Thoroughbreds weigh 500 kilograms, and run 55-65 kilometres an hour on spindly legs with ankles that are the same size as humans'.

Mr. Baffert says the breed has changed, becoming more fragile, with more speed. Other horses get worn out on the deeper dirt, he said.

"We lose these horses and we mourn. There's nothing worse, for the workers that work with them. When that horse doesn't come back to that stall, it's a very sad situation."

Of the 29 fatalities at Santa Anita so far this season, three horses have died under one trainer - Jerry Hollendorfer. The Globe contacted Mr. Hollendorfer by phone and asked whether he thought any of those deaths were preventable. "That's an unanswerable question ... my barn has complied with every single thing they've asked us to do," he said, before hanging up.

"It's been an educational experience for everyone involved in horses," Mr. Baffert says. "For jockeys, trainers, trackmen, I think a lot of good is going to come out of this." M M Ms. Stronach knows how it feels to watch a vibrant horse like Princess Lili B stumble and fall. It was part of her childhood experience when her parents took her to the races on weekends. Looking back, Ms. Stronach says, "I didn't enjoy my time at the track as a young person, especially when I witnessed a breakdown or catastrophic injury. That really turned me off the sport."

She says attracting new fans to the track means eliminating, or at least cutting down, on injuries to horses, and making the welfare of animals a priority. "We have to represent the values of our customers," Ms. Stronach says. "Those customers don't want to see horses being whipped. And they don't want to see horses being drugged to run."

Before the racing season began at Santa Anita, TSG introduced a number of health-related reforms. More steps were taken after fatalities mounted. The company, working with owners and trainers, rolled out more stringent regulations around the use of medication.

For example, it is commonplace to give North American horses a diuretic drug called Lasix in an attempt to improve performance. But the medication is banned in Europe. New rules cut the limit on Lasix dosages by half and Santa Anita plans to phase out the drug next year.

TSG brought more vets to the track during training and races - up to four vets now monitor daily workouts, and they have the power to scratch horses and flag thoroughbreds for additional monitoring.

The approach to triage was revisited, to ensure rehab was the first priority, as opposed to euthanizing an injured horse. TSG also added PET diagnostic equipment - a horse's version of an MRI machine - to X-rays and ultrasound equipment at Santa Anita, to help detect pre-existing conditions. "The goal is to make California racing the best and the safest in the world," Ms. Stronach says. "Part of that goal is that no horse will be racing while on medication, or training with pain-masking drugs."

Santa Anita has also reduced the jockey's use of the riding crop.

Jockeys are no longer allowed to raise the crop above their shoulder when they whip the horse. And they are pulling in outside experts to monitor the condition of tracks and establishing national databases to track a horse's health, no matter where it races.

The measures TSG has taken have won praise from a surprising source: The animal advocates at PETA, or People for the Ethical Treatment of Animals. "The Stronach Group has decided they're going to - finally - revolutionize how racing is conducted in the United States. I've certainly had my criticisms of them over this issue in the last three months, but they have made more significant changes in racing than anybody in two generations," said Kathy Guillermo, PETA's senior vice president, based in northern California.

She says horse racing is experiencing "a crisis like I've never seen before," and thinks a lack of uniform regulations across jurisdictions is one of the problems. Ms. Guillermo says PETA still opposes the use of animals for sport. "But we're also very practical. And even though racing is at a crisis point, it isn't going away tomorrow. It's a multibillion-dollar industry in this country. There are many jobs involved.

So we feel a very strong obligation to make it as safe as possible."

Others simply don't think it can be fixed at all. "Horse racing has been given cover under the banner of sport since the beginning," said Patrick Battuello, founder of Horseracing Wrongs, a group seeking to end horse racing in the United States. "In fact, it's nothing more than animal exploitation, animal cruelty and animal killing, no different than Ringling Bros, SeaWorld, and greyhound racing, all of which are either gone or are in the process of going."

For Ms. Stronach, making horse racing safer is central to her campaign to make it a sexier - and more lucrative - sport. TSG's makeover of the business started with the grandstands. After subsisting on "crappy hotdogs" while visiting tracks as a child, Ms. Stronach turned up the heat in Stronach kitchens by hiring away chefs and food and beverage executives from the Four Seasons hotel chain and Las Vegas resorts. Stealing a page from music festivals such as Coachella, TSG began staging concerts and video-game tournaments as a backdrop to races, with an emphasis on acts that appeal to millennial audiences. At a recent event at Pimlico in Baltimore, the headliners were electronic music producers Deadmau5 and Steve Aoki. At Gulfstream, singers Post Malone and Pharrell Williams joined Ms. Stronach to perform and watch the ponies. Santa Anita hosted its first eSports tournament in November, in partnership with Chinese ecommerce giant Alibaba.

Behind the scenes, TSG built a media network that puts horse races - at its own tracks and rival circuits - on TV screens in casinos and off-track betting facilities. The company also rolled out technology to allow wagering on races from any location, including a cellphone. The size of the crowd at a TSG track becomes less important if gamblers can bet on the race from anywhere in the world. Ms.

Stronach points out TSG-owned secure gambling platforms were set up ahead of a U.S. government move last year to relax gambling laws.

She believes that TSG will benefit from what is expected to be a dramatic increase in wagering on sports such as football, basketball and baseball.

Over the past five years, TSG's revenues from racing and gaming have nearly doubled, to US$1.1-billion, according to court documents filed in the Stronach family lawsuit. Ms. Stronach predicts sales could double again in the next five years, saying: "We are just getting started." TSG also nearly doubled its market share in U.S. racetrack betting since 2013. The company now accounts for 28 per cent of all legal wagering.

Profit margins on the existing business are modest, though. One source told The Globe and Mail the business makes about US$75million to US$80-million. A bigger business opportunity lies in making better use of the land. At Santa Anita, says Ms. Stronach, racing is central to the company's "live, work and play" approach to developing its real estate. Over time, Santa Anita and other TSG tracks will see their vast parking lots and aging grandstands updated with hotels, casinos, stores and homes, she said. For example, Gulfsteam executives recently hired urban planning firm DPZ Partners to launch a renovation of the Miami property that could include a rail-side luxury hotel and a pedestrian tunnel that would transform the green space in the middle of the track into a public park.

Caught in the middle of all this uncertainty about the fate of the Stronachs' assets and the future of the sport are the workers, largely Latino, whose livelihoods depend on the track. On Wednesday, a group of them gathered in a prayer circle by the Seabiscuit statue, to hold hands and pray for their jobs and the horses and the track.

"We lift up everybody that's involved with Santa Anita racetrack ... Lord, there's been a lot of negativisms said about this place, but Lord, a lot of people really don't know the inside," said Pastor Eli Hernandez, chaplain of Santa Anita racetrack.

On Thursday, dozens of low-wage workers and their families gathered at the stands for a first-ever news conference, posters in hand.

"If Santa Anita were to close, I wouldn't have a place to go. The experience that I have is not transferable to other jobs," said Dagoberto Lopez, who has worked as a groom for 35 years and whose job helps support his three children. As for the horses, "I feel like the horses under my care are like my family; I take care of them as if they were my children."

Some still fear the whole track will be shuttered and redeveloped.

April Verlato, the mayor of the town of Arcadia, (pop. 58,000), where the track is located, says the grandstand and façade are of historic significance to the state of California, suggesting there would be numerous hurdles to tearing it down. "It would be very difficult."

Zoning changes are possible, subject to council approval, to allow for development in the perimeter of the park, she says, indicating that - generally for land of that size - residential development would hypothetically be most profitable.

The land on which Santa Anita sits is vast, and valuable. House prices have soared in the past decade, driven by wealthy Asian buyers who are investing in real estate as a safe haven in the area, said Kevin Kwan, senior vice-president at Century 21 in Arcadia.

"In Los Angeles, you don't see that big [of an area] of usable land here, besides the other old racetrack, which they turned into a football stadium," he said. Mr Kwan estimates the Santa Anita site is worth at least a billion dollars.

As for the mayor, she's worried about the impact on jobs, particularly among vulnerable workers, many of them immigrants, should the track close. "People have this perception that everybody at the track is rich, they're all owners, they're all jockeys, they're celebrities," Ms. Verlato says. "But there are a lot of low-income workers ... I'm concerned for them."

Santa Anita finishes its season this weekend, with 10 races each on Saturday and Sunday.

More than 200 horses are expected to compete. Ahead of a trip back to California from Toronto, Ms. Stronach said the horse-racing industry has done a great deal to make the sport safer, but more reforms are needed. She says: "We need to raise our standards as an industry, with horse welfare at the centre of that movement. Otherwise, I don't want to be part of it."

After Sunday's last races, Santa Anita will shut down for the summer. It will reopen in September, when the days get cooler. Most of the horses will be loaded into trailers after this weekend and will head off to other tracks, including California sites such as Los Alamitos and Del Mar. They'll keep running.

Associated Graphic

At Santa Anita Park in Arcadia, Calif., 29 horses have died since late December, drawing media attention and calls for the track to close.

PHOTOS BY BARBARA DAVIDSON/THE GLOBE AND MAIL

Belinda Stronach, president of The Stronach Group, which owns Santa Anita, has resisted calls to shutter the track. The Stronachs have made large investments in horse racing and find themselves at the centre of its fight for survival.

MICHAEL ROBINSON/THE WASHINGTON POST

Jockeys and exercise riders take part in a morning workout on Wednesday at Santa Anita. The track has a storied history, with Seabiscuit and American Pharoah among the horses to have raced there.

Dozens of low-wage Santa Anita workers staged a rally on Thursday. More than 1,200 people work at the track, and many local jobs are at stake as the rash of horse deaths amplifies the voices of critics.


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GMP sells capital markets arm to U.S.-based Stifel for $70-million
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Independent investment bank to focus on wealth management as financial sector consolidates
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By ANDREW WILLIS, CLARE O'HARA
  
  

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Tuesday, June 18, 2019 – Page B1

GMP Capital Inc. is exiting the capital markets business, selling its investment banking arm to U.S. brokerage house Stifel Financial Corp. for approximately $70-million in a dramatic shift for what was once one of Canada's most successful independent investment dealers.

In the latest sign of consolidation in financial services, GMP Capital's bankers and traders will join St. Louis-based Stifel, which has built a national U.S. platform by making more than two dozen acquisitions during chief executive officer Ronald Kruszewski's 22 years at the helm.

GMP Capital, founded in 1995 by veteran deal makers, made its name raising money for entrepreneurial businesses such as Research in Motion - now BlackBerry Ltd. - and cannabis, mining, and oil and gas companies in recent years. But, like BlackBerry, the Toronto-based investment bank that once boasted a market value of $2-billion is undergoing a transformation. Its core business will now revolve around its 33-per-cent stake in wealth manager Richardson GMP, which has approximately $30-billion in assets and 170 teams of financial advisers.

Once the Stifel transaction closes, GMP Capital plans to buy the remaining 67 per cent of Richardson GMP from its employees and Winnipeg's Richardson family in a stock swap that will make the Richardson clan the company's largest shareholder. GMP Capital will hold approximately $198million in cash. That capital is earmarked for expanding the wealth management platform by recruiting financial advisers and potentially adding new services such as robo-advisers, specialized lending and asset management.

"This transaction is all about turning the focus onto [Richardson GMP], giving it the oxygen, the focus and the capital it requires to become a really powerful force in the wealth management space in Canada as an independent, non-bank-owned firm," said Sandy Riley, CEO of Richardson Financial Group Ltd. He said Richardson Financial is in favour of swapping its stake in the wealth management company for additional shares in GMP Capital, where the family already holds a 24-per-cent stake.

After the Stifel sale, GMP Capital plans to pay a one-time 27.5cent-a-share special dividend to shareholders.

A handful of GMP Capital veterans are expected to depart when the deal is done, including co-founder and deputy chairman Kevin Sullivan.

GMP Capital has faced years of tumult. A downturn in resource markets, declining trading commissions and a failed expansion strategy knocked the firm's market capitalization down to $150million last week. CEO Harris Fricker said it was "frustration" over a declining stock price and the issue of how to best serve clients that drove a strategic review by the board to conclude with the sale to Stifel.

"In thinking about the industry, you ask: Are you growing or declining in terms of your relevance to clients?" said Mr. Fricker, who plans to move to Stifel with most of GMP Capital's senior executives. He said that to stay relevant to GMP Capital's small to medium-sized corporate customers the firm needed far better access to U.S. capital markets, something it could not build on its own.

"The addition of GMP further enhances our institutional business given its strength in the Canadian markets and within the technology, health care, cannabis and energy verticals," Stifel's Mr.

Kruszewski said.

GMP's stock price jumped 13 per cent on news of the buyout Monday, closing at $2.29 on the Toronto Stock Exchange. The company's shareholders and regulators need to approve the transaction, which is expected to close this fall.

More than 50 independent Canadian investment dealers have been acquired in the past five years, leaving approximately 160 firms, according to the Investment Industry Association of Canada. Ian Russell, CEO of the IIAC, recently predicted that the continuing downturn in financing activity and rising regulatory costs will reduce the number of domestic dealers to fewer than 100 in the next two years, closing doors to small-cap Canadian companies looking to raise capital.

This is Stifel's second attempt to build a Canadian franchise.

The firm inherited a team with offices in Calgary and Toronto in 2010 when it acquired U.S. rival Thomas Weisel Partners Group, Inc., which previously paid $150million to buy Canadian boutique dealer Westwind Partners. GMP Capital's Mr. Fricker said Stifel brass decided the Westwind team lacked the skills and relationships needed to build a business and shut the operation down in 2013.

Most significant U.S. investment banks already have offices in Canada, and Stifel executives said the domestic market ranks fourth globally in terms of generating investment banking fees, behind only the U.S., China and Britain. Victor Nesi, co-president of Stifle, said acquiring GMP "not only extends Stifel's business into the Canadian markets but will also enhance our offerings to our U.S. and U.K. clients."

Law firm Goodmans LLP advised GMP Capital on the transaction, while Stikeman Elliott LLP, Lazard Canada Inc. and Sheumack & Co. GMC LLC worked with the special committee of GMP Capital directors.

GMP CAPITAL (GMP) CLOSE: $2.29, UP 27¢ STIFEL FINANCIAL (SF) CLOSE: US$56.30, DOWN 27 US CENTS


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Stifel in talks to buy GMP Capital
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St. Louis-based company looks to expand into Canada with acquisition of independent investment bank, sources say
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By ANDREW WILLIS, JEFFREY JONES, NIALL MCGEE
  
  

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Monday, June 17, 2019 – Page B1

Toronto's GMP Capital Inc. is in talks to be acquired by Stifel Financial Corp., according to sources in the financial sector, in a deal that would see a U.S. company swallow one of the last sizable independent investment banks in Canada.

GMP Capital, founded in 1995, had a long run as a leading Bay Street investment dealer, but its stock price has slid steadily over eight years as it struggles with a prolonged slump in resource financing, declining trading commissions and a failed expansion strategy. At its peak in 2006, the company was worth $2-billion; its market capitalization on Friday was $150-million.

GMP Capital and Stifel declined to comment on whether the two companies are in negotiations. It is possible the talks could break down, but sources familiar with the situation said the two sides were on track to announce a deal this week. The Globe and Mail granted the sources anonymity because they weren't authorized to speak publicly about the matter.

Stifel executives were reportedly in Toronto last week trying to negotiate long-term employment contracts with key GMP executives at the Shangri-La Hotel. One source said the goal is to close the takeover deal by September.

Stifel, a full-service investment bank with approximately 7,100 employees, turned a US$385-million profit on revenues of US$3billion last year.

The company has a US$4-billion market capitalization and over the past 10 years its stock price has almost doubled.

GMP Capital is a far smaller entity, with profit of $15-million in 2018 on revenues of $178-million. But it does have one valuable asset in addition to its investment-banking business: It owns a third of wealth-management company Richardson GMP Ltd., which has assets under management of $30-billion. The Winnipeg-based Richardson family also owns a third, as do employees of Richardson GMP. Investment-banking sources said a number of GMP Capital employees move to Richardson GMP if there's a deal with Stifel.

There is a long tradition of independent investment dealers in Canada eventually selling to larger companies. The sources say GMP Capital caught the attention of several U.S dealers interested in expanding into Canada, including St.

Louis-based Stifel. In recent months, there was talk that U.S.

players such as Jefferies Financial Group Inc. and Wells Fargo & Co. were also sniffing around GMP, but executives have dismissed this speculation, to date.

Stifel has acquired a string of smaller rivals in recent years as part of a strategy aimed at building what chairman and chief executive Ronald Kruszewski refers to as a "pre-eminent middle-market" investment bank. In his comments on the company's recent financial results, Mr. Kruszewski said: "In our institutional business, our growth will continue to be driven by the addition of high-quality talent through selective hires and strategic acquisitions."

Stifel's last foray into Canada ended poorly. The company inherited a 60-person team with offices in Calgary and Toronto in 2010 when it acquired U.S. rival Thomas Weisel Partners Group, Inc., which previously paid $150-million to buy Canadian boutique dealer Westwind Partners. The Canadian unit never made inroads in domestic underwriting and stock trading and Stifel shut it down in 2013.

Stifel may be attracted to GMP by its robust relationships with cannabis-industry players, although that line of business may also represent a challenge for the U.S. company, according to the sources. U.S. federal regulations restrict investment-banking activity in the cannabis sector. A number of GMP bankers are said to be concerned that they would be forced to turn down lucrative deals in the marijuana industry if they join Stifel.

The future of GMP Capital is a source of fascination in banking circles, as the company was home to larger-thanlife founders - including financier Brad Griffiths and trader Mike Wekerle - who stepped away over the past decade. For years, GMP Capital executives were among the country's highest paid bankers; Tom Budd, the former lead energy banker in GMP's Calgary office, made $12.5-million in 2002, twice what a bank CEO made that year. In contrast, current GMP CEO Harris Fricker took home $4.3-million last year.

Over Mr. Fricker's nine-year run as CEO, GMP Capital attempted to extend its reach with acquisitions, buying Calgary-based FirstEnergy Capital Corp. for $99-million in 2016 and spending US$44-million on a New York-based fixed-income business in 2014.

The prolonged downturn in energy markets forced Mr. Fricker to retrench: GMP Capital took a $28.5-million impairment charge against goodwill from acquisitions in the most recent quarter. GMP Capital sold the U.S. fixed-income business late last year and closed a number of offices outside Canada.

GMP Capital's stock price has been trending downward for several years, closing at $2.02 last Friday compared with $9 five years ago and $27 in 2006. Employees own 24 per cent of the dealer and the Richardson clan owns another 24 per cent.

Over the past five years, more than 50 Canadian investment dealers have exited the industry through amalgamation or takeovers, leaving about 160 domestic companies, according to the Investment Industry Association of Canada (IIAC). In a recent report, IIAC CEO Ian Russell said: "We anticipate even more firms to leave the business in 2019, given the ratcheting up in operating costs and prospect of an extended period of depressed market conditions."

Mr. Russell warned that fewer independent domestic investment banks spells trouble for Canadian capital markets.

"A continuation in this trend will lead to a significant consolidation in the investment industry with the corresponding damaging impact on the competitive diversity in the domestic retail marketplace and capital-raising for small and midsized businesses in public and private markets."


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Raptors' owners score big as NBA title adds millions in value to team
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Saturday, June 15, 2019 – Page B1

When the Ontario Teachers' Pension Plan owned a majority stake in the NBA's Toronto Raptors and parent Maple Leaf Sports & Entertainment Ltd., fund executives bristled at those who accused them of milking the franchise for money, rather than trying to win.

Jane Rowe, the executive managing director of Teachers who oversaw the $1.32-billion sale of the pension fund's stake in MLSE in 2012, said at the time: "Did we not want them to win? That I find to be a very mind-boggling question."

The Raptors' magical spring, which culminated in their first title on Thursday night, captivated the country. It also means money, and lots of it. Winning alters the value of a sports franchise, often permanently. In 17 years as an owner of MLSE, Teachers made an estimated fivefold return on its investment, but never got the big score that comes with fielding a champion.

That windfall is coming instead to Rogers Communications Inc., BCE Inc. and MLSE chairman Larry Tanenbaum, who stand to turn the Raptors' championship into a serious win at the cash register.

The two telecom companies each own 37.5 per cent of the sports company, which also owns the NHL's Toronto Maple Leafs, the CFL's Toronto Argonauts and soccer club Toronto FC. Mr. Tanenbaum holds the remaining 25 per cent, and is a more traditional pro sports owner who bought into MLSE in 1998 after successful investments in paving and cable businesses.

For the Raptors, clinching the team's first NBA title is a "massive marketing and merchandising event' that matches the recent end of long-running championship droughts at two storied baseball franchises, the Boston Red Sox and Chicago Cubs, said Matt Powell, vice-president and senior adviser on sports for New York-based consulting firm NPD Group.

"If I was running the Raptors, I would renegotiate every commercial agreement on merchandise and sponsorship, and I would look at increasing ticket prices to the extent I could do so without alienating fans," Mr. Powell said.

"Those would be my secondary priorities," he added. "My first priority would be re-signing Kawhi Leonard."

From both a marketing and personal point of view, the team's three owners stand to reap rewards that are hard to measure, but far more valuable than selling more Raptors swag ahead of Monday's victory parade in Toronto.

They're winners: Weeks of gripping playoff games and one wild night of partying across Canada have washed away years of disappointment.

The Raptors' championship adds new lustre to its backers and their brands.

"There's a direct benefit that comes from winning," said David Soberman, a professor at the University of Toronto's Rotman School of Management who specializes in marketing. While a portion of the windfall is easy to calculate - a run on Raptors T-shirts and caps, a spike in TV advertising at Bell- and Rogers-owned cable networks - Mr. Soderman said the larger and longerlasting benefits come from building brands that help consumers distinguish between otherwise interchangeable products such as cellphones or savings accounts. Mr. Soberman said: "Even if they don't admit it, subconsciously, people will sign up for Bell or Rogers phones because they associate the logo with the Raptors."

The halo of success around Canada's only NBA team will last longest for companies with brands or a value proposition that line up with what the team represents. Ken Wong, a professor at Queen's University's Smith School of Business, said there's a short-term boost for companies that jumped on the Raptors bandwagon with TV advertising campaigns, such as website developer GoDaddy Inc.

A winning season forges deeper ties for sponsors such as Tangerine, the online bank owned by Bank of Nova Scotia. Mr.Wong pointed out that the Raptors' ethnically diverse, digitally savvy fan base is neatly aligned with Tangerine's target customers. "Sponsors have far more to gain if their brand and the Raptors' build off each other," he said.

Winning is fuelling an already impressive run in the value of Toronto's NBA franchise.

The Raptors played their first game in 1995, after the team's original owners paid the league a record expansion fee of US$125-million.

By the start of this season, the team was worth an estimated US$1.68-billion, slightly under the league average of US$1.87-billion.

By comparison, the Toronto Maple Leafs are valued at US$1.45-billion, far above the NHL's average team value of US$630-million. Sports economist John Vrooman of Vanderbilt University says winning a title boosts the Raptors' value into the upper echelon for NBA teams, as it's the long game that matters most for team valuations. Hoisting the Stanley Cup matters less than market size for NHL valuations, he says, using the oft-beleaguered Leafs as an example. But in basketball, Mr.

Vrooman said: "Consistent winning over a cumulative five-to-10-year span is relatively important for NBA club values."

With a report from Josh O'Kane


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For market and Teachers, Baker's property deals are no longer enough
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Tuesday, June 11, 2019 – Page B1

Richard Baker has shown he sees value in real estate that eludes the rest of us.

As the 39th governor of the venerable Hudson's Bay Co., Mr.Baker has tried to find new ways to make a buck at the country's oldest company, which was founded in 1670.

The New York-based financier authored one of Canada's greatest real estate trades. Mr. Baker was widely expected to lose a pant-load of money on the Zellers chain as Walmart Inc. crushed its rival in Canada. Instead, he flipped the leases on 220 Zellers stores to Target Corp. in 2011 for $1.8-billion. This may qualify as the most one-sided property transaction of all time: Target quit Canada within four years after horribly botching its launch.

Why, then, has HBC stock performed so poorly, potentially handing Mr. Baker the company through Monday's buyout offer, and all the upside that will come with redeveloping the flagship properties that remain in the chain's 300-store portfolio?

Consider Mr. Baker's run.

Where many department stores became wastelands as shoppers moved online, the HBC boss turned empty floors into trendy shared office space by partnering with WeWork Companies Inc. Mr.Baker's sale of a flagship store on New York's Fifth Avenue to WeWork in 2017 put US$850-million in HBC's coffers.

The sale also forged a relationship that saw WeWork join forces with Mr. Baker in Monday's $1billion bid to take HBC private.

The WeWork sale was the latest in a series of transactions that come with one common theme: Mr. Baker sold an asset for far more than anyone else thought it was worth.

In Vancouver, Mr. Baker sold the landmark Hudson's Bay store last year for $675-million to Asian investors. The previous year in Toronto, he flipped a downtown store to Cadillac Fairview Corp.

Ltd. for $650-million. That deal ensured the real estate arm of the Ontario Teachers' Pension Plan footed at least part of the bill and risk that came from converting half the property into a Saks Fifth Avenue store.

There are no prizes for guessing what Mr. Baker will do if his $9.45-a-share offer for HBC is accepted by investors. Freed from the tyranny of quarterly reporting, he'll quietly keep selling real estate, repurposing stores and attempting to keep familiar retail chains relevant to a new generation of people who shop using their phones rather than visiting a store.

Despite Mr. Baker's enviable track record, sophisticated investors such as Ontario Teachers no longer want to be along for the ride. The pension fund sold 18 million HBC shares to Mr. Baker last week at $9.45. The fact that HBC shares closed at $9.07 on Monday, below the offer price, signals there's no expected competitor to the buyout bid, and no expectation Mr. Baker will increase his offer.

The market, and Ontario Teachers, are signalling that Mr.Baker's deft touch is no longer enough to fix the company. Even with real estate sales, HBC is bleeding red ink. The company lost $631-million last year, compared with a $139-million loss the previous year.

Investors who are selling into the $9.45-a-share buyout price - a 47-per-cent premium to Friday's close - are taking a view that the HBC's governor will run out of trophy properties to sell before he fixes all that ails his various retail brands. Besides Saks and Hudson's Bay, the company owns the Lord & Taylor chain and Belgium's Galeria INNO. HBC properties in Germany were sold Monday for $1.5-billion.

HBC stock did rally in 2014 after Mr. Baker took the company public in 2012 at $17 a share, but then went on a four-year slide that has led to Monday's buyout offer.

For all the real estate deals and for all the talk of the value of the underlying land - HBC minority shareholder Land & Buildings Investment Management LLC put a $31-a-share valuation on the properties last November - a great many investors have lost faith.

The special committee of HBC directors named on Monday, and advisors Blake, Cassels & Graydon LLP and J.P. Morgan Securities, will be conscious of the fact that many investors want to hand this company over to Mr. Baker and let the real estate mogul work with his own money.


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Activist investors dig into mining companies for the long haul
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Monday, June 10, 2019 – Page B1

Activist investors shook up Canada's clubby gold mining industry over the past two years by targeting boards at a dozen companies and winning an impressive number of battles. More campaigns are in the works, and even the largest mining companies may be vulnerable.

But can the activists deliver on the heightened expectations that come with their successful board fights?

It's easy to understand why outsiders such as hedge fund Paulson & Co.

Inc. get broad support when they target a laggard such as Detour Gold Corp.

Detour's stock, which hit $35 in the summer of 2016, plunged below the $10 mark last year amid a litany of problems at its flagship mine, northeast of Timmins, Ont.

That kind of story is too familiar in gold mining.

Over the past 10 years, returns from Canadian gold company shares have trailed gold prices by a large margin.

Shareholder services firm Kingsdale Advisors, a central player in a number of boardroom battles, published a report on the mood of the gold sector last week that said, "We have heard shareholders complain - first privately and now increasingly publicly - about sustained poor performance vs. peers or the index; poor market guidance; project delays; capital overruns; inability to secure 'routine' permits and negotiate licenses; and excessive compensation."

Paulson's year-long campaign against Detour saw it turn over the majority of the board of the Torontobased gold miner.

The New York-based fund, best known for founder John Paulson's profitable bet against subprime mortgages prior to the global financial crisis, is also working at uniting fellow grumpy investors by backing an activist group called the Shareholders' Gold Council.

The Detour campaign was one of 13 proxy battles to play out in the gold sector over the past 26 months. Activists achieved all or part of their goals in all but three contests. "Investors have lost faith in the boards of gold mining companies' ability to manage risk and are seeking out ways to push for change," Kingsdale said. "Any company, no matter its profile, size or asset base, can be an activist target."

But like the dog that chases a car, then catches it, there's the nagging question of what comes after an activist victory in a proxy battle.

Detour shows that boardroom victories don't quickly translate into stock market gains.

Throughout its long proxy battle, Paulson & Co.'s game plan for Detour consisted of installing new management, then selling the company. Step one is done. Step two - finding a buyer for a miner with a single property, in Northern Ontario - is proving far more difficult so far, in a sector that is skittish about paying high prices for acquisitions. Paulson & Co. has won boardroom battles at Detour, but to date, the fund has lost money on this investment.

Most activist funds use the same playbook as Paulson. They target poor performers with the goal of putting the company in play. These funds capitalize on justifiable investor frustration with management teams that took home massive pay packages for posting subpar results. In mining, that means activists often end up with board seats at companies with significant operational problems; even the most successful mine is a daily engineering challenge.

Only a handful of fund managers have the experience and stamina required to fix busted mining plays. Brookfield Asset Management Inc. recently did it with North American Palladium Ltd. Former Barrick Gold chief executive officer Aaron Regent, who runs Magris Resources Inc., also uses operating skills as the starting point for investing in mines. As activists began roiling the sector, Magris spent US$500-million to acquire properties in Quebec from Iamgold Corp.

Kingsdale's report highlighted the fact that many of the activists now targeting gold miners are patient money. "For the most part, these are not your short-term corporate raiders or anklebiters," the advisory firm said. "Their interests are long term; they're not only in it for a quick lift in share price."

That long-term view is useful for anyone diving into mining stocks. The sector's fortunes are going to be driven in large part by commodity prices and the ability of management teams to deliver complex projects, on time and on budget. For gold stocks, the whims of bullion markets - which have been strong lately - are always going to have a big impact on the share price. The arrival of activist investors promises to reshape boardrooms at gold mining companies, but it doesn't change the underlying dynamics of the sector for investors.


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Ford's desire to get beer into corner stores conflicts with his 'Open for Business' agenda
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Thursday, June 6, 2019 – Page B5

Ontario Premier Doug Ford's obsession with getting six packs into corner stores is now officially killing his Progressive Conservative government's "Open for Business" agenda.

The populist Premier picked a fight with the world's biggest brewers last week by threatening to tear up a deal that grants the Beer Store, a 445-outlet chain primarily owned by the foreign brewing giants behind Labatt, Molson and Sleeman, a near-monopoly on retail beer sales.

The PC government plans to rip up a 10-year agreement with the Beer Store, signed in 2015 by the previous Liberal government, in order to pave the way for beer and wine sales in convenience stores and big-box retailers.

It's the latest faceoff between the Ford government and corporations over broken contracts. Since coming to power a year ago, the PC government cancelled plans for wind farms owned by a German company and meddled in Hydro One Ltd., scotching a planned $4.4-billion cross-border takeover. Partly privatized Hydro One and German energy company wpd AG opted to avoid a public fight. In contrast, Big Beer has pulled out the big guns - deploying corporate lobbying groups to make their case.

"There are few factors more critical to investment and economic growth than the legal certainty and predictability fostered by respect for the rule of law," Neil Herrington, senior vicepresident of the U.S. Chamber of Commerce, said in an open letter to the Premier on Wednesday.

The U.S. group, which recently played host to Mr. Ford at its Washington office, said terminating the Beer Store contract "could undermine ... the case the Ford government has made that the province is open for business."

"Our strong concern is that terminating an existing contract, and doing so without compensation ... risks sending a negative signal to U.S. and other international investors about the business and investment climate in Ontario," Mr. Herrington said.

He speaks for an organization with three million members, including Anheuser-Busch InBev SA, which owns Labatt and is the world's largest brewer, and Molson Coors Brewing Co., home to politically connected chairman Peter Coors.

The same closed-for-business sentiment is coming out of Mr. Ford's home turf. Ontario Chamber of Commerce chief executive Rocco Rossi wrote an open letter to the government last week, saying: "Cancelling a contract sends an alarming message to the business community in Ontario and beyond, which could potentially deter investment."

Making it easier to get beer and cannabis is the bright, shiny object Mr. Ford seems intent on waving in front of voters. The government recently introduced legislation that allows booze during tailgate parties at sports events and served up "buck-a-beer" to consumers by lowering the minimum price.

The Ford government is expected to announce as early as Thursday that up to 80 additional grocery stores will be stocking beer and wine, and approximately 200 new provincially supervised retail outlets known as agency stores will open their doors. Both moves can take place under the existing contract with the Beer Store. The government will soon announce plans for at least 50 new cannabis outlets, according to sources close to the government, after giving permits this spring to 25 privately owned shops across the province.

A flurry of booze and cannabis store openings may win fans among Mr. Ford's voter base, but corporate leaders are shaking their heads.

In his letter, Mr. Rossi said, "Our members believe the government of Ontario must take a strategic - rather than a piecemeal - approach to alcohol policy."

The Ford government's preoccupation with booze is also handing the opposition a club they can use to beat on the PCs' image as business friendly.

"Nobody wants to see the government blow possibly hundreds of millions of dollars to break a contract," NDP Leader Andrea Horwath said on Wednesday. "No businesses are going to want to invest in a province where the climate is such that the government is indicating that they have no interest in the rule of law."

The Beer Store is warning Ontario will face hundreds of millions of dollars in penalties if contracts are broken, including potential lawsuits anchored in the North American freetrade agreement. The retailer's union is telling the government that its confrontational approach will alienate workers.

Labatt, Molson and Sleeman collectively contribute $4-billion annually to the provincial economy. For a government that considered stamping "Open for Business" on Ontario licence plates, there's a rich irony in these battles with some of the province's biggest consumerproducts companies.


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DHX Media receives 'unusual' bid from Indian auto company
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Wednesday, June 5, 2019 – Page B2

An auto-parts company from India is making an unsolicited and unusual takeover overture for TV production company DHX Media Ltd., saying it is offering to buy the owner of the Peanuts and Teletubbies brands at a 300-percent premium to where its stock was trading.

Sakthi Global Holdings said in a news release that it is making an "unsolicited merger proposal" for Halifaxbased DHX priced at $5.32 a share, with $1.32 to be paid in cash and $4 to be paid in Sakthi stock, which is thinly traded on the U.S. over-the-counter (OTC) market.

DHX shares closed on Tuesday at $1.96 on the Toronto Stock Exchange, up 9 per cent from the previous day but well below the Sakthi offer. The stock traded at $2.28 early in the session. At Tuesday's close, DHX's market capitalization was $290-million, while the Sakthi offers values DHX at $718-million.

In response to Sakthi's early morning news release, DHX put out its own release on Tuesday that said: "At this time, Sakthi Global Holdings has not responded to questions from DHX Media and DHX Media has not been able to verify the ability of Sakthi Global Holdings to carry out a transaction."

Halifax-based DHX said its board of directors will review any formal offer for the company, but cautioned, "There can be no certainty that a transaction will take place with Sakthi Global Holdings or any other party."

DHX's board held a formal strategic review last year that included potentially selling the company, and concluded that process in September after selling a minority stake in the Peanuts cartoon brand to Sony Music Entertainment (Japan) Inc. for $235.6-million.

"The whole approach of Sakthi appears unusual to us," analyst Aravinda Galappatthige at Canaccord Genuity Group Inc. said in a report on Tuesday.

He listed five major obstacles to a deal, including foreign ownership restrictions on Canadian media companies, a lack of capital at Sakthi needed to fund the $180-million cash portion of the bid and an OTC-listed Sakthi stock that is "not a reliable currency" for the $4-per-share stock component of the offer.

Sakthi's release describes the company as a manufacturer of car chassis and powertrain components with a US$1.2billion market capitalization. The company's announcement of the DHX bid was riddled with spelling mistakes and grammatical errors: The potential buyer said if the takeover is successful it will see "Sakthi Global shareholders emerging as the majority shares [sic] holders of the combined companies."

Phone calls to Sakthi's U.S. office in Bethesda, Md., went to a voice mailbox that was full and could not accept messages.

In the past, foreign entities have occasionally broached the idea of taking over Canadian companies, then fade away in the face of scrutiny from boards of directors, financial advisers and regulators.

DHX MEDIA (DHX) CLOSE: $1.99, UP 21¢


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COURTSIDE AT THE 2019 NBA FINALS
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By ANDREW WILLIS, MEGAN DEVLIN
  
  

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Monday, June 3, 2019 – Page A8

TORONTO -- For a basketball connoisseur like NBA commissioner Adam Silver, the best seats in Scotiabank Arena are a few rows back from the court, where he's just high enough in the stands to take in all the action as the Raptors play for their first championship.

A few CEOs with an eye for value hold the same view.

Royal Bank of Canada boss Dave McKay and retired Bank of Nova Scotia head Rick Waugh will take in the playoffs from a dozen rows back, near the corner of the court where Raptors president Masai Ujiri occasionally stands during games.

But for a select group of Toronto's corporate elite, the only place to be for a basketball game is courtside. It's one of the toughest tickets to score in professional sports, an opportunity to watch the NBA Finals with your feet on the parquet. The face value of a ticket to the finals is $11,054, but as the ads say, these tickets are really priceless.

There are approximately 110 courtside slots in the arena - the number drops during the playoffs as seating is revamped to squeeze in additional TV broadcasters. From this perch, CEOs, entrepreneurs and celebrities of various flavours become part of the game, with Kawhi Leonard lining up buzzer-beating shots directly in front of them, Drake heckling a few seats away and the occasional errant pass whizzing by their heads.

The couple sitting between Raptors head coach Nick Nurse and Drake? That's David Kassie and wife Susan Harris, CEO of Executive Coaching Associates. He's the executive chairman of investment bank Canaccord Genuity and a former guard on McGill University's basketball team.

The past and present of pro basketball in Toronto hold the best seats in the house, directly across from the teams' benches. On one side of centre court, next to the U.S. broadcasters, you'll find John Bitove, the private equity kingpin who teamed up with broadcaster Allan Slaight to bring an NBA franchise to Toronto in 1993. Mr. Bitove eventually sold the team but kept his prime spot. His neighbour is Cargojet founder Ajay Virmani, who recently struck a marketing partnership with the Drake. Mr. Virmani makes a cameo in a recent post on Drake's Instagram feed, which has 57 million followers, when the rapper tours Cargojet's tricked-out "Air Drake" Boeing 767 jet.

On the other side of centre court sits Maple Leaf Sports & Entertainment (MLSE) chairman Larry Tanenbaum and wife Judy - he's the one with the ear-to-ear grin as he moves closer to realizing a lifelong dream of bringing championships to Canada. MLSE owns the Raptors, pro soccer's Toronto FC, the CFL's Argos and the NHL's Maple Leafs. Mr.

Tanenbaum, a billionaire from investments that include paving, bottling Coca-Cola and cable, is also chairman of the NBA's board of governors, which makes him Mr. Silver's boss and the big wheel in pro basketball.

Mr. Tanenbaum could sit wherever he wants. It speaks volumes that he opts to cede the four best slots, closest to the middle of the floor, to his MLSE co-owners. Bell Canada boss George Cope is a regular, while the other seats are typically taken by Rogers Communications CEO Joe Natale or chairman Edward Rogers, who was at Thursday's game against the Warriors. Fashionista wife Suzanne Rogers made an appearance last week to watch the Raptors finish off the Milwaukee Bucks.

For years, during deep playoff runs and some truly brutal campaigns, the Tanenbaums have sat next to Indigo Books and Music founder and CEO Heather Reisman and husband Gerry Schwartz, founder and CEO of asset manager Onex.

Mr. Schwartz notably came and went during the nail-biting Game 7 win over the Philadelphia 76ers. The next morning, Onex announced a friendly $3.5-billion bid for WestJet. For the first game of the championship, the couple played host to actor Cynthia Dale and retired CBC anchor Peter Mansbridge. The next two seats are home to real estate mogul Ed Sonshine and wife Fran.

A revolving cast of actors, musicians and athletes are mixed in among the CEOs and featured prominently on the arena's Jumbotron screens. No league welcomes celebrities and their attendant buzz like the NBA. MLSE spokesman Dave Haggith says the team's owner holds four seats and fills them with celebrities by working with agents and promoters. He said: "It's an age-old tradition in the NBA, and Toronto is known as Hollywood North. There are always a lot of celebrities in town."

Skier Lindsey Vonn and hockey-player boyfriend P.K.

Subban, a Toronto native, got an invite early in the playoffs, as did singer Shawn Mendes, a native of Pickering, Ont.

Golfer Bubba Watson made the list for the first game against the Warriors. Maple Leafs forward Mitch Marner, who is negotiating a new contract with the hockey club this summer, has been a courtside regular during the Raptors' playoff run.

The seats under the basket near the Raptors' bench are home to Canada Goose CEO Dani Reiss and mining financier Sheldon Inwentash - when players fly off the court after a layup, they end up in Mr. Inwentash's lap. Mutual fund manager Blake Goldring has slightly safer seats, just around the corner.

Under the basket near the Warriors' bench you'll see selfdescribed superfan Nav Bhatia, the feel-good story of this playoff run. An immigrant who has never missed a Raptors home game in 24 years, the auto dealership owner is a classic self-made success.

Down the row is real estate agent extraordinaire Sam McDadi, tech entrepreneur and former Dragons' Den cast member Bruce Croxon, and fellow dragon and Boston Pizza chairman Jim Treliving. In a moment he'll never live down, Mr. Treliving was photographed sitting stone-faced when Kawhi Leonard sank a heart-stopping buzzer beater.

Associated Graphic

PHOTOGRAPHY BY FRED LUM/THE GLOBE AND MAIL GRAPHIC BY JASON CHIU


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Analysts stand by Corus despite recent hiccups
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Viewership dip amid NBA Finals, last week's share sale seen as minor bumps ahead of company's third-quarter results at end of June
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Monday, June 3, 2019 – Page B5

Analysts see better days ahead for Corus Entertainment Inc. as the company bounces back from a poorly received share sale last month and a temporary loss in viewers and advertisers to Toronto Raptors playoff games on rival networks.

Investment banks began publishing reports on Corus last week that highlighted the potential for rising advertising revenues, lower debt and a higher stock price, after being temporarily silenced for two weeks during a $548-million sale of Corus stock. Regulators restrict what analysts can say about a company when it is in the midst of an underwriting.

Toronto-based Corus, owner of the Global television network, specialty TV channels and radio stations, reports third-quarter results on June 26, and is coming off two consecutive quarters of better-than-expected financial performance.

In a report on Friday, analyst Adam Shine at National Bank Financial said, "Notwithstanding the deeper run by the Raptors in the NBA playoffs, Corus' third quarter optimism isn't likely to be dampened."

Raptors games are broadcast in Canada by TV networks owned by Rogers Communications Inc.

and BCE Inc., both of which hold stakes in the team. The Raptors' run to the NBA championship is temporarily reshaping the TV advertising market, as corporations jump at the opportunity to link their brands with the team.

Looking ahead to Corus's prospects after the NBA season, which will end by mid-June, Mr.Shine said, "Besides expectations of better results in a seasonallystrong third quarter and possible momentum in the fourth quarter, the start of fiscal 2020 should benefit from federal election spending."

Mr. Shine raised his target price on Corus stock to $8.50 from $8, and pointed out the company trades at a significant discount to the valuation of comparable U.S. broadcasters such as Viacom Inc. and Discovery Communications Inc.

A number of Bay Street analysts also had target prices for Corus in the $8 range going into last month's stock offering. Corus shares closed Friday at $6.45 on the Toronto Stock Exchange, up 14 cents.

Corus stock went on a rollercoaster ride last month after a group of 13 investment dealers led by TD Securities Inc. purchased 80.6 million shares from Shaw Communications Inc. on May 14, then attempted to sell the stock to investors for $6.80 a share in what is known as a bought deal. Corus shares were changing hands at $8 before the launch of the deal.

The underwriting sold poorly and the banks subsequently cut the price to $6.25 in an attempt to sell approximately 60 million remaining shares. The transaction closed on May 31, and sources who worked on the share sale said the investment dealers lost more than $20-million on the bought deal. The Globe granted anonymity to the sources because they are not authorized to speak publicly about the matter.

One headwind in the Corus stock sale was a lack of demand from index funds, which hold shares in every company that is in a benchmark such as the S&P/ TSX Composite Index. Corus was taken out of the S&P/TSX index in September, 2018, after a sharp decline in the share price - Corus stock was below $4 at the time.

Investment bankers working on last month's offering said after the recent increase in the share price, Corus could rejoin the benchmark as early as this fall.

Returning to the S&P/TSX index would result in demand for approximately 10 million Corus shares.

Shaw Communications sold a stake in Corus acquired in 2016 and is focusing on expanding its wireless and cable networks.

Analyst Robert Bek at CIBC World Markets said in a recent report, "While the deal does not move the needle from a valuation perspective, it does make a lot of sense for strategy as it allows Shaw to get off what was clearly a non-core asset all the while raising some funds to further its wireless growth strategy."

The Calgary-based Shaw family continues to control Corus through a dual-share structure.

Both Corus and Shaw Communications were founded by 84-yearold entrepreneur J.R. Shaw. His daughter Heather Shaw is the executive chair of Corus, a position she has held since the company went public in 1999, and her sister Julie Shaw is vice-chair.

Associated Graphic

Television and radio broadcaster Corus is coming off two consecutive quarters of better-than-expected financial performance ahead of reporting third-quarter results on June 26.

COLE BURSTON/THE CANADIAN PRESS


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Who's cashing in on the Raptors
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After 24 years, Toronto has made the NBA Finals. It's a moment that marks a new apex for basketball in Canada - and the team's brand
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By SUSAN KRASHINSKY ROBERTSON, JAMES BRADSHAW, ANDREW WILLIS
  
  

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Saturday, June 1, 2019 – Page B6

If a puck drops in St. Louis - and the only Canadian team left in the spring postseason wears sneakers instead of skates - does it make a sound?

Well, yes, but it's drowned out by the euphoric rumpus of Toronto Raptors fans, both the long-suffering and the newly minted. Deep down, hockey is still intrinsic to Canada's DNA.

But at this heady time for Canada's only NBA franchise, you'd be forgiven for thinking you're in basketball country.

It's taken 24 years for the Raptors to make the Finals, a historic moment for sports fans in the city and across the country. It's the first time the National Basketball Association Finals have come to a court outside the United States, turning a multitude of eyes toward Toronto. However the series shakes out after that exhilarating first win, and even if Toronto is once again served a nosh of humble pie, this represents a new apex for basketball in Canada - and for the Raptors brand.

Among the team's sponsors, advertisers, the broadcasters that air the games and others - it has tipped off a mad scramble to make the most of the celebrations and capitalize on the Raptors' success.

"This is as busy a week as I can remember in our history," said Bart Yabsley, president of Rogers Communications Inc.'s Sportsnet.

SCOTIABANK AND TANGERINE Industry insiders did spit takes at the price tag Bank of Nova Scotia paid to rebrand the home of the Toronto Maple Leafs and the Raptors in 2017. The namingrights deal, which changed Air Canada Centre to Scotiabank Arena, was a whopping $800million over 20 years.

It also allowed Scotiabank to take over as the official bank of the Raptors, as soon as rival Bank of Montreal's five-year contract with the team expired in July, 2018. Scotiabank then bestowed the title on its low-cost digital subsidiary, Tangerine Bank.

The rationale was simple: Scotiabank already held the coveted spot as the official bank of the Leafs, and with its no-fee accounts and branchless strategy, Tangerine was a good match for the younger, more diverse and digitally savvy Raptors fan base.

"One-third of our customer base at Tangerine are Raptors fans," Tangerine chief executive officer Gillian Riley said in an interview.

For BMO, which spent five years as a sponsor only to lose its affiliation just as the team finally took it to the next level by making it to the Finals, the recent run of success must be a bitter pill to swallow. What's more, BMO sponsors the Milwaukee Bucks, who fell to the Raptors in the last round. A BMO spokesperson declined comment.

Now, every time the Raptors take to the court for a playoff game, and the sprawling crowd roars in Jurassic Park outside Scotiabank Arena, Tangerine feels the tremors. On playoff game days and the day after, Tangerine sees a 50-per-cent spike in traffic to its website and a 20-per-cent bump in customers who sign up by creating a customer ID.

The bank's dream scenario is still to have the Leafs make the Stanley Cup finals, which would draw "man-on-the-moon kind of viewership," said John Doig, Scotiabank's executive vice-president of retail distribution, who was formerly chief marketing officer and one of the architects of the Scotiabank Arena deal. But this is "a really close second."

The first measure of any sponsorship is its ability to raise awareness of a brand. When the NBA season started last fall, only 6 per cent of Raptors fans were aware of Tangerine; by the start of the playoffs, that number was 40 per cent, and Ms. Riley suspects it is now "well in excess of 50 [per cent]."

Tangerine logos are plastered all over Scotiabank Arena. And this week, Scotiabank went so far as to wrap 15 of its downtown Toronto branches, and part of its headquarters, in Tangerine orange - a rare instance of merging the two brands, which are typically kept separate.

The bank also scrambled earlier this week to tweak and refresh its Raptors-themed ads, tailoring them to the team's arrival in the Finals. "Saturday night, after [Game 6], everything changed," Mr. Doig said. "Sometimes you plan for it. Sometimes you do an emotional, emotive spot, and then you get lucky to be able to play it."

For Scotiabank, the Raptors connection has been a chance to woo clients and to host its highest-value customers and prospects in luxury suites or courtside seats.

Looking back at the $800-million, "we don't have a worry in the world there," Mr. Doig said.

OTHER SPONSORS AND ADVERTISERS "We're in the war room right now with clients talking about how to leverage this," said Brian Cooper, chairman and CEO of MKTG, which helps negotiate sponsorship deals and counts a number of Raptors sponsors among its clients. "It is a marketer's dream.

... Everyone is now looking for new budget, because none of this was planned."

Some deals are made within a day. Cineplex Inc. quickly secured approval from the team owners and the league to host viewing parties in its movie theatres across the country. (None of its Toronto theatres are participating, as the city already has celebrations at multiple outdoor venues.) The events will bring in plenty of concession revenue, but CEO Ellis Jacob said it's also a marketing opportunity for the cinema chain, which has been working to attract new audiences and to diversify beyond the sometimes volatile movie business.

"It reinforces us as an entertainment company, and wanting to give people opportunities to come to the theatres," he said.

Sneaker company New Balance, which has a sponsorship deal with Raptors star Kawhi Leonard, attracted incalculable buzz last weekend in Toronto when it released a very limited run of T-shirts with the words "fun guy," riffing on the famously stoic player's description of himself, stated in a characteristic deadpan at a news conference.

Epic lineups formed outside stores, and a small offering online sold out almost instantly.

Long-time sponsor Sun Life Financial Inc. jumped at the opportunity when the Raptors first put a logo patch on their jerseys at the start of the 2017 season. It gave the brand visibility in every close-up of a Raptors player. The insurer's research has found a three-fold increase in consumer awareness of the company. "The icing on the cake for us is that basketball is a global game, and we are a global brand," said Milos Vranesevic, Sun Life's chief marketing officer. In addition to increased North American media exposure, the Raptors' twomonth playoff run is significantly increasing exposure for the company in key Asian markets such as China and the Philippines.

Not all sponsors have had the best luck.

Scotiabank exercised a veto in its deal on competing financial institutions, ending the team's sponsorship with Horizons ETFs Management (Canada) Inc. as of the 2018 season. "As you can imagine, I'm not too happy with Scotiabank, because we were extremely proud of our partnership with MLSE and the Raptors," Horizons ETFs CEO Steven Hawkins said.

GoDaddy, a sponsor since late 2016, has watched two of the three players it chose to star in its ads - Jonas Valanciunas and C.J.

Miles - lost to trades.

"We would have sold out," said Anne de Aragon, country manager at GoDaddy Canada, of C.J.'s PJs. The line of pyjamas was sold through a GoDaddy website to promote the company's sitebuilding services. Thousands of units sold before the trade. But Ms. Aragon's team had prepared for the possibility, dressing Mr.

Miles in generic gear rather than a Raptors uniform for its most recent campaign. The company is still happy to be associated with the team, especially now, she said. Her team is brainstorming ways to offload the leftover merchandise. "We don't have a ton," she said cheerily. "We'll figure out what to do with our PJs."

THE OWNERS AND BROADCASTERS What makes the fan base valuable to advertisers and sponsors is not just that they are younger and more diverse than your average hockey devotee, it's that the demographic does not tend to congregate by gathering around TVs to watch the same thing at the same time.

"They're a harder-to-reach [demographic] when it comes to television," said Stewart Johnston, president of media sales and marketing for TSN.

Through their stakes in team owner Maple Leaf Sports & Entertainment Ltd., BCE Inc.'s TSN and Rogers Communications Inc.'s Sportsnet divide the broadcast rights for the Raptors. As luck would have it, Sportsnet was the broadcaster for Mr. Leonard's dramatic buzzer-beater that clinched the series against Philadelphia, the series-winning victory against Milwaukee and the Game 1 win against Golden State on Thursday.

The latter drew a record average audience of 3.3 million viewers. Aside from shows such as The Big Bang Theory and Game of Thrones, few television programs draw millions of viewers to a single broadcast any more.

The NHL playoffs usually pull in big numbers, but with no Canadian teams still in it, ratings have corroded. Game 1 of the finals between St. Louis and Boston drew an average audience of 1.8 million to Sportsnet - a respectable number, but nowhere near what the finals usually pull in. According to Numeris data, NHL games did not crack the top 30 programs for English Canada for three weeks in a row starting April 29. The most recent numbers are for May 13-19, a week when the Bruins completed their sweep of the Carolina Hurricanes and the Blues played four of their five games against the San Jose Sharks. Among the shows that did make the top 30 that week were Island of Bryan, Station 19 and Whiskey Cavalier.

"It has not been a disappointing or lacklustre season," said Sportsnet's Mr. Yabsley, adding the company feels fortunate to have both hockey and basketball rights. The Raptors' success has kicked off a whirlwind of TV content planning and advertising sales at Rogers.

Unlike hockey, where advertisers more frequently sign deals that lock in playoff ads ahead of time, a Canadian playoff run in basketball opens up more ad inventory to be sold at the last minute - and at a premium.

That premium might be higher if the broadcast rights were exclusive, but as it is, Bell and Rogers are competing with each other in the market.

THE TEAM AND THE CITY This playoff run is forming lasting bonds between the team and its fans, many of whom weren't alive to see Toronto's greatest sporting moments, such as the Blue Jays' World Series wins in 1992 and 1993 or the last time the Maple Leafs won the Stanley Cup - in 1967.

"This is establishing new levels of emotional connection, of engagement, of national reach that has always been [the Raptors'] aspirational goal," said Gord Hendren, president of Charlton Insights Inc., an independent research company.

The NBA fan base in Canada increased significantly from 2014 to 2018, according to Torontobased Solutions Research Group, especially among people 18 to 34.

"We expect that number to increase substantially by a factor of 39 per cent based on a current study we are doing," said SRG president and research director Kaan Yigit.

Previously casual fans are now invested in the Finals, and a certain percentage of them will be converted into more engaged long-term followers of the team.

That could increase the value of the team - much more so if they manage a win. Research has shown that a championship can have long-term benefits for merchandise sales, advertising and sponsorships.

"That's the real difference between winning the championship and just going to the Finals - the championship has this enduring effect," said Norm O'Reilly, a leading scholar on the business of sport at the University of Guelph. If the balloon pops, the team loses, and Mr. Leonard leaves town, the impact will not be totally erased, he added. "But it's significantly lower than if they win."

The team began remaking its image in 2014, working with advertising agency Sid Lee to redesign the Raptors logo and brand.

Sid Lee also developed the "We the North" campaign, a slogan that has been adopted en masse by fans.

"We didn't want something that felt like an advertising campaign," said Tom Koukodimos, co-managing partner of Sid Lee Toronto and a creative director on the Raptors account. The work was meant to harness a feeling of being outsiders - both as the only Canadian team in the league and for a fan base that includes many people who have come to Canada from elsewhere - and to transform that outsider status into a rallying cry.

"The attitude and the confidence in the fans - there's a different confidence, it's unapologetic," Mr. Koukodimos said.

"It's not your typical Canadian attitude. That's what we wanted to tap into from the get-go."

Does anyone embody that attitude more than Drake? He has worked with the team for six years as its "brand ambassador."

As part of the partnership, the Raptors recently renamed their practice facility the OVO Athletic Centre, a nod to Drake's record label and clothing brand, October's Very Own.

Drake has delivered. The rapper's courtside antics - from exuberant shouting to massaging head coach Nick Nurse's shoulders and trolling the Warriors' Stephen Curry by wearing a retro Raptors "Curry" jersey as a reminder that the opposing star's father once played for Toronto - are gleefully unapologetic. But they are just a microcosm of his larger work to boost the cachet of the team - and of Toronto.

In May, 2018, Charlton Insight estimated Drake's economic impact on Toronto at $440-million.

But considering the massive attention he has drawn during the playoffs, it's a safe bet that the effect on tourism and international exposure for the city "has increased significantly" in recent weeks, Mr. Hendren said.

"Any brand in the world would benefit from having someone like him as your ambassador," Mr.Koukodimos said.

This kind of cultural phenomenon is what the Raptors' founders - John Bitove, along with former Ontario premier David Peterson, businessman Phil Granovsky and others - worked to build more than two decades ago when they met with the NBA.

"We were trying to get their confidence that we would do it differently and create a basketball culture, not just own a sports team," Mr. Bitove said. "I have to give the current ownership a lot of credit. I don't think we'd have as good a team and as avid a fan base if they didn't give it the financial resources, from both a marketing and a player payroll perspective."

He and co-founder Allan Slaight envisioned a team for "the next generation" of Canadians.

Watching the Finals is "very emotional," he said.

"There is a real basketball culture here now."

Associated Graphic

PHOTOS BY VAUGHN RIDLEY/GETTY IMAGES, GREGORY SHAMUS/GETTY IMAGES. PHOTO ILLUSTRATION BY THE GLOBE AND MAIL

SOURCE: YOUGOV SPORT; BASE: ROLLING 1-WEEK AVERAGE AMONG ONTARIO RESPONDENTS AGED 18+; CHARLTON INSIGHT


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Oil-loving banks must reckon with the future
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CEOs' support for energy projects will be unable to withstand investors' push for better climate initiatives
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By ANDREW WILLIS
  
  

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Saturday, June 1, 2019 – Page B4

At first glance, Canada's big banks look to be solidly behind the country's major energy companies when it comes to exploiting the massive reserves locked up in Alberta's oil sands.

Toronto-Dominion Bank showed its faith this week by committing $3.25-billion to Canadian Natural Resources Ltd., a loan the Calgary-based company used to snap up 1.5 million acres of oil sands properties from Devon Energy Corp., the latest foreign player to exit the sector.

The same support shone through in recent speeches bank chief executives delivered in Calgary, a city that's still reeling from a downturn in energy prices that dates back five years.

Bank of Nova Scotia boss Brian Porter pounded the table for new pipelines and quicker government approval of energy projects. That followed a pitch from Royal Bank of Canada CEO Dave McKay for using the oil sands to transform the country's economy.

To date, global banks have also stood fast in the face of criticism from environmentalists over their involvement in what they brand, with considerable venom, the "tar sands." Groups such as Greenpeace and the Rainforest Action Network have spent years staging protests against JPMorgan Chase & Co.

over its close ties to energy companies. Yet JPMorgan, along with Goldman Sachs Group Inc., proudly stepped forward this week as advisers to Devon Energy on the sale of its Canadian assets.

Look deeper, and it becomes clear the bankers' support for energy companies in general and the oil sands in particular is becoming more qualified. There are clear trends in finance circles that will make it far more difficult for energy companies to raise capital, such as institutional investors' widening embrace of environmental, social and governance (ESG) criteria in managing portfolios.

European investors were early to the idea that ESG principals are central to deciding what stocks to buy and sell. Their influence played a part in last year's decision to curtail lending on new oil sands projects at Europe's largest bank, HSBC Holdings PLC.

For some time, ESG concepts have percolated through North American institutions, including massive index-fund managers such as BlackRock Inc. and Vanguard Group Inc., which are among the largest shareholders in every Canadian bank. Placing a larger emphasis on ESG criteria puts oil sands investments in a different light.

Scotiabank held a well-attended conference on ESG trends this spring. One oil-company chairman who was in the room said institutional investors talked of being fed up with companies that attempt to gloss over their environmental impact with public-relations stunts, such as an airline company that highlighted a program to recycle paper straws rather than dealing with fuel consumption and other material issues. Energy companies can be guilty of the same sleight of hand - focusing on steps taken to ensure ducks don't land in tailings ponds rather than on their emissions of greenhouse gases.

Bank CEOs can afford to ignore protests from environmentalists. They can reason with regulators. Bank CEOs cannot disregard demands from their largest shareholders. If significant numbers of institutional investors start telling bank boards and management teams that they no longer support lending on oil sands projects, including pipelines, then capital will dry up.

Bankers can read the tea leaves. TD Bank CEO Bharat Masrani is stepping up for oil sands clients by lending billions to the likes of Canadian Natural Resources. He's willing to wade into the public debate around energy policy by devoting a few lines of his speech at the bank's recent annual meeting to the need for new pipelines and new global markets for Canadian oil.

But Mr. Masrani spent a far larger portion of his presentation to TD's shareholders talking about what the bank is doing to support Canada's transition to a low-carbon economy. He said TD plans to devote up to $100-billion to green projects by 2030, a bank-wide initiative that sweeps in lending, financing and asset management. The bank is already 30 per cent of the way to this target, and Mr. Masrani estimates this contributed $15-billion to GDP, supported 76,000 jobs and avoided 780,000 tonnes of greenhouse gas emissions. He said: "Clearly this transition can be good for the environment and the economy."

Today, the banks are shoulderto-shoulder with Alberta's oil sands companies. That support cannot withstand a shift in sentiment among institutional investors. Over time, the financial crowd will push for a greener future.


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Moneyball: How corporate Canada is cashing in on the Raptors' stunning success
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By SUSAN KRASHINSKY ROBERTSON, JAMES BRADSHAW, ANDREW WILLIS
  
  

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Saturday, June 1, 2019 – Page B1

The Toronto Raptors' run to the NBA Finals is a marketer's dream, as young, diverse fans celebrate across the country.

Companies that hitched themselves to the team are reaping the rewards, while rivals sit on the bench.

Susan Krashinsky Robertson, James Bradshaw and Andrew Willis report B6

Associated Graphic

Fans gather outside Scotiabank Arena before the Toronto Raptors' NBA Finals match against the Golden State Warriors on Thursday.

MELISSA TAIT/THE GLOBE AND MAIL


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Ford takes on beer industry with bill that paves way for corner-store sales
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By JEFF GRAY, ANDREW WILLIS
  
  

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Tuesday, May 28, 2019 – Page A1

TORONTO -- Ontario Premier Doug Ford is tearing up a deal with the big-brewery-owned Beer Store retail chain to avoid having the province pay hundreds of millions in penalties as he seeks to fulfill a campaign promise to allow beer and wine sales in corner stores.

And owners of the beer retailer warn the battle could now be headed to court.

Mr. Ford's Finance Minister, Vic Fedeli, introduced a bill in the Ontario Legislature on Monday that would terminate the 2015 deal signed by the previous Liberal government with the quasi-monopoly Beer Store, which is primarily owned by the foreign brewing giants behind Labatt, Molson and Sleeman and operates 445 outlets across the province. Negotiations between the government and Beer Store are expected to continue, but Mr. Fedeli is escalating the fight by giving the Progressive Conservatives the power to unilaterally transform a retail network first launched in 1927.

The bill comes after weeks of talks and amid a public-relations battle between the government and the Beer Store over Mr.Ford's pledge to allow beer and wine in corner stores, more grocery outlets and big-box retailers. The 2015 "master framework agreement" between the brewers and Queen's Park was negotiated to allow the government of Kathleen Wynne to expand beer sales in just 450 grocery stores, but was meant to stay in place for 10 years.

Since being elected, Mr. Ford's government also introduced legislation that allows booze during tailgate parties at sports events, and served up "buck-a-beer" to consumers by lowering the minimum price on a bottle of suds.

The bill on beer sales came without any public warning on the same day that Mr.Ford announced a temporary climb-down in his fight with Toronto Mayor John Tory and other mayors about cuts to public health, ambulances and daycares, and after a series of polls showing sagging support for Ontario's PC government, first elected about a year ago.

The bill also came on the same day the government unveiled a bill to overhaul mental-health and addiction services, as well as lay the groundwork for joining a B.C. class action lawsuit aimed at holding pharmaceutical companies responsible for the opioid overdose crisis.

Monday's proposed legislation on beer sales, barely four pages long, would wipe out the 2015 deal and cancel the Beer Store's long-held exclusive right to sell beer in 12- and 24-packs in most places. Mr.

Fedeli said the government plans to pass the bill before the legislature rises for the summer in two weeks. But he also suggested that the government remains open to future talks with the Beer Store on allowing corner-store sales.

Speaking to reporters, Mr. Fedeli dismissed the notion that tearing up a contract would put a chill on doing business with the province, calling it a terrible deal, and saying no other place in the world allows private brewers this kind of retail monopoly: "This is a Kathleen Wynne sweetheart deal. It is anti-competitive, and quite frankly if left alone would continue to be anti-competitive for the next six years."

The Beer Store immediately warned it would challenge Mr. Fedeli's move in court.

In a letter dated Monday and obtained by The Globe and Mail, the Beer Store's lawyers warn Attorney-General Caroline Mulroney and an external lawyer for the government on the file that ripping up the deal will "legislate 7,000 Ontario-based Beer Store employees out of work and cause billions of dollars in damages" as well as "result in higher costs and prices for consumers."

The letter warns that the brewers may sue Mr. Ford's government "on the basis that the legislative process has been improperly used by third-party interests" or on the grounds that the bill is "unconstitutional and constitutes misfeasance in public office." The Beer Store's lawyers warn the government to preserve all records, including texts and e-mails, for a list of officials that includes Mr. Ford and his chief of staff, Dean French, and including any communication with industry groups working with the government pushing for the changes, including the Ontario Convenience Store Association and the Retail Council of Canada.

Industry sources had warned that ironclad language in the Beer Store deal, signed by the previous Liberal government in 2015, would force the government to pay hundreds of millions in damages if it violated it. But constitutional law experts say it is impossible to bind a provincial government in such an agreement, as it retains its power to simply pass a law declaring any such contract void and eliminating the need to pay any compensation. However, it is regarded as an extreme move that has prompted court challenges to other governments in the past.

Both the Beer Store and its union had recently launched ad campaigns targeting the government's liberalization plans.

"Doug Ford promised no one would lose their jobs as a result of his policies," said John Nock, president of United Food and Commercial Workers Local 12R24, which represents the Beer Store's 7,300 employees. "Now he's cancelling contracts, creating chaos and kicking good jobs to the curb."

Mr. Fedeli's bill comes just days after the government's special adviser on liberalizing alcohol sales, Ken Hughes, submitted a report on the future of the sector to Mr. Fedeli. The report, released Monday afternoon just after Mr. Fedeli introduced his bill, is harshly critical of the Beer Store and the 2015 deal, which merely extended arrangements that date back decades and have been blessed by governments of every stripe. However, the report stops short of recommending ripping up the Beer Store deal, instead urging the government to "do everything possible" under the agreement to allow beer in more outlets but also to consider "other available options" if talks fail.

The government does not need to put the bill into effect as soon as it is passed, meaning that talks could continue with the Beer Store. But with the legislature rising for the summer, the legislation clearly puts the option of completely terminating the deal on the table, if another round of talks with the Beer Store fails.

The opposition at Queen's Park accused the government of making the Beer Store announcement to distract from its other problems.

"This government has an obsession with alcohol ... I don't think it is in line with Ontarians' most important priorities: health care and and education," interim Liberal leader John Fraser told reporters.

Associated Graphic

After Ontario Finance Minister Vic Fedeli, seen at right with Premier Doug Ford in 2018, unveiled the proposed beer-sales bill on Monday, the Beer Store immediately warned it would challenge the move in court.

COLE BURSTON/THE CANADIAN PRESS


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CMHC boss takes aim at big banks for 'cavalier' mortgage lending
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Monday, May 27, 2019 – Page B1

Evan Siddall, the guy who backstops $448billion in mortgages for Canadian homeowners, is calling out the big banks for what he calls irresponsible behaviour that's fuelling a highly leveraged residential real estate market.

Mr. Siddall is chief executive of Canada Mortgage and Housing Corp. He's important. He runs a Crown corporation that helped 123,000 people purchase homes last year by stepping up with mortgage insurance. But Mr. Siddall is still a civil servant. And government officials don't typically tear a strip off executives at the country's biggest banks. The CMHC boss must have missed that memo.

Mr. Siddall engaged in a round of name and shame last week with economists at Toronto-Dominion Bank and Canadian Imperial Bank of Commerce over what he portrayed as a self-interested campaign to ease the mortgage stress tests put in place by federal regulators in recent years to cool the housing market. His pointed criticism, laid out in a public letter the CMHC sent to the House of Commons finance committee, is part of far larger concerns over the state of the country.

Canadians continue to carry far too much debt, according to CMHC data, which puts the country at risk of an economic slowdown.

Riffing off studies of past downturns, including the 2008 global financial crisis, he said: "The combination of high house prices and elevated debt led inexorably to reduced future economic growth."

Mr. Siddall sounded like he wrote the letter while Game of Thrones was on his TV and took to heart the show's oft-repeated warning that winter is coming.

Federal Conservative Leader Andrew Scheer is banging the same drum, warning in a recent speech that the federal Liberals are living beyond their means while the economy is humming, that today's deficit spending will hamstring the government down the road, when GDP growth slows and stimulus is required.

In refreshingly plain terms, Mr.Siddall pointed out that the mortgage stress tests are proving to be excellent public policy. He conceded that tougher lending requirements make it more difficult for some potential buyers to get a loan from their bank. But the CMHC and the federal government want to make housing affordable for as many Canadians as possible by reining in excessive borrowing, which only jacks up prices. "Changes in stress test requirements since 2010 have helped reduce house prices nationally by 3.4 per cent versus where they otherwise would have been," Mr. Siddall said.

Then he turned his guns on the banks, which drum up mortgages and backstop their higher-risk loans at the CMHC. Looking back at recent bank publications, Mr.Siddall said: "In an astonishing piece of work, economists at TD Bank argued that the stress test should be removed so that house prices can increase by $32,000.

CIBC's economist has also called for a re-assessment of the stress test.

"Since a federal government guarantee stands behind lenders' insured mortgages, these appear to be cases of evident moral hazard. I doubt they'd be as cavalier if it were their risk."

For those who need a quick refresher on the concept of "moral hazard," this civil servant is saying TD and CIBC economists are recommending a high-risk course of action because the bankers know the CMHC bears the consequences of their behaviour. It's worth noting that Mr. Siddall is not your typical career mandarin.

He was a senior executive at Goldman Sachs Group Inc. and Bank of Montreal prior to joining the CMHC.

By coincidence, TD, CIBC and Royal Bank of Canada were reporting their financial results as the CMHC boss sounded off. In each bank's call with analysts, senior executives faced queries about the performance of their mortgage portfolios, which are heavily weighted to urban centres such as Toronto and Vancouver, where home prices have soared.

None of the bankers showed concerns over the rising consumer debt levels highlighted by the CMHC. The common theme of the calls: Don't worry, we got this.

To their credit, all three banks reported extremely low losses on home loans. Top brass at each bank said they're aware residential housing markets are frothy.

But each insisted they have systems in place to sift through mortgage applications and lend to deserving homebuyers while rejecting potential deadbeats. Of course, those systems have never been tested by a significant downturn in residential real estate markets.

There were no echoes of Game of Thrones in this crowd. Canadian bankers don't seem to believe that winter is coming when it comes to mortgages. Or at least they sleep well, knowing that the CMHC - and by extension the Canadian taxpayer - is shouldering the risk of a downturn in housing markets.


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Remaking Scotiabank Brian Porter is making big changes, but will investors buy in?
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By JAMES BRADSHAW, ANDREW WILLIS
  
  

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Saturday, May 25, 2019 – Page B6

In 2014, shortly after taking over as chief executive officer at Bank of Nova Scotia, Brian Porter took 150 or so of the bank's most senior executives to the Sheraton in Toronto for an off-site strategy session. The presentation included a slide that listed the words staff most closely associated with working for the country's thirdlargest bank.

Mr. Porter highlighted words drawn from employee surveys that talked of a collegial, almost familial organization. It spoke to a deeply ingrained culture of loyalty and continuity. Most managers in the ballroom were lifelong Scotiabankers. At times, their promotions and paycheques reflected seniority as much as talent.

But apart from front-line staff, only 10 per cent of employees had used the word "customer" in the surveys.

Mr. Porter told the bank's leaders that Scotiabank could no longer rest on its familial spirit alone. He intended to push a different culture, defined by different words, such as "performance" and "accountability." He has been true to his word.

Five and a half years into his tenure, the 61-year-old has remade a 187-year-old bank. Your view of his handiwork depends on where you sit.

There are clients, employees and institutional investors who say his constant push for transformation is essential to ensuring Scotiabank can keep pace with digital and regulatory changes.

And there are detractors, including long-time employees both current and former, who say the CEO is moving too quickly and knock him for curbing the collegiality that made Scotiabank a great place to work and for sacrificing institutional memory.

Moreover, there's a dissenting view from the market: After years of commanding a premium valuation, the stock now trades at a significant discount to peers.

Mr. Porter wanted the bank to measure itself against rivals more often. But many of the large strategic moves he's made - such as a $7-billion string of acquisitions over the past year - are multiyear bets that have yet to strengthen the bottom line, and investors have been loath to pay for potential. The bank's total return of 28.8 per cent in the past five years ranks it leagues behind four of its Big Six competitors.

Last August, when Scotiabank had the worst-performing stock among Canada's big banks, CIBC World Markets Inc. analyst Robert Sedran wrote in a research note that its share price had been "hurt by macro themes like the outlook for global trade, emerging markets and bank-specific issues like an aggressive acquisition calendar. ... We think these issues have obscured some of the things that are going right for this bank." In 2019, Scotiabank shares are still near the back of the pack and Mr. Sedran's sentiments hold true.

Everyone agrees Mr. Porter won the top job in November, 2013, with a mandate to retool Scotiabank. As the most international of Canada's banks, with significant operations in South America, the Caribbean, Asia and the United States, it was heavily buffeted by the regulatory winds of change that blew through markets after the global financial crisis in 2008. And yet, it was relatively small in Canadian retail banking, especially in lucrative business lines such as wealth management and credit cards.

The debate now is about whether Mr. Porter is making the right changes, at the right pace. On the issue of speed, the CEO's mind is made up: He says the bank is "not rash, we're not impetuous" - that colleagues yearning for the Scotiabank of yesterday need to adjust to a new reality.

"I don't want to leave here when my time's up saying 'coulda, woulda, shoulda,' and 'we weren't bold enough,' or 'we didn't have the courage,' " Mr. Porter said. A voracious reader, he highlights a business book that studied the common traits of successful CEOs: "When asked, 'What would you do differently?,' they all said, 'I would have moved faster.' They mean that in a thoughtful, rigorous way."

AGENT OF CHANGE Scotiabank's board anointed Mr. Porter as CEO in part because he proposed an ambitious agenda: Streamlining international operations, expanding the wealth management business and embracing digital technology. He also wanted the bank to focus more on customer satisfaction and to benchmark itself more often against rivals.

Tom O'Neill, who recently retired as chairman after overseeing Mr.Porter's first five years as CEO, called the plan "off-the-charts brave."

Mr. Porter broke with the bank's tradition of rewarding loyalty. He replaced virtually all of the most senior executives around him - some retired, but a number of veterans departed abruptly and unceremoniously. The core Canadian banking and capital-markets divisions have cycled through two sets of leaders in five years. And the bank's succession plans have been redrawn almost from scratch.

Inside Scotiabank, some departed managers are characterized as "blockers" - a management-consulting term for those unwilling or unable to change. Yet, some say the unrelenting churn in the senior ranks has had an unintended consequence: Employees whose mentors have left now live in fear of making mistakes, making them loath to take necessary risks.

The new wave of Scotiabank leaders is younger, hard-charging and fiercely loyal to Mr. Porter. They include Dan Rees, who was just named head of the core Canadian banking division, and Jake Lawrence and James Neate, the new co-heads of the corporate- and investment-banking arm.

Mr. Porter also recruited key executives who had built their careers at rivals, marking a radical shift for a bank that had historically promoted from within. Michael Zerbs came aboard to head the technology group in 2014 after running a money manager and an arm of IBM.

Ignacio (Nacho) Deschamps arrived in 2016 to run the international unit and shape its digital transformation after serving as CEO of Mexico's largest bank, Grupo Financiero BBVA Bancomer.

The bank had traditionally aspired to be a fast follower on technology but was late to innovations such as ATMs and mobile apps.

"That's not the case today. We put a line in the sand," Mr. Porter says.

Mr. Deschamps and Mr. Zerbs were tasked with driving a new digital agenda. Early on, Mr. Porter took senior bankers and board members to Silicon Valley for a lesson in pace.

"He wanted that mindset to be understood," Mr. Zerbs says. "A mediocre outcome is clearly not okay any more. Like, we have to be the best ... and also make mistakes along the way."

Much of the heavy lifting on technology occurs behind the scenes, as the bank strips costs out of its legacy infrastructure through automation, cloud computing and advances in artificial intelligence. But to incubate the necessary sense of urgency, Scotiabank set up "digital factories" in five countries - Canada, Mexico, Peru, Chile and Colombia. The labs undertake rapid-fire projects aimed at solving bank-wide pain points for customers, sometimes rewriting computer code that can be deployed in the span of a few days.

Mr. Porter "didn't tell us, 'Build a digital factory.' He asked us the question: How does it become impactful? How do you scale? And then we came back with the idea of the factory," Mr. Zerbs says. It took only a short discussion with Mr. Porter and a visit to the bank's powerful operating committee to get the green light. "[After] maybe a 10- or 15-minute discussion, we had the go."

A CALLING Mr. Porter isn't shy about breaking with tradition, but he knows Scotiabank's roots. He points with pride to an oak table stacked with papers in his Toronto office. Bank directors gathered around this same table in the 1800s, when the bank shared office space in Halifax with Dalhousie University. The school surprised Mr. Porter, a graduate of its commerce program, by giving it to him when he became CEO.

His great-grandfather Hector McInnes was a director at the bank, as was Mr. McInnes's son, Donald. "I see banking as a calling," Mr. Porter says. "We take seriously our role in the economic and social fabric of every country we operate in."

Mr. Porter was born in Calgary, where he attended high school, before graduating from Dalhousie in 1981. Unlike his predecessor CEOs Rick Waugh, Peter Godsoe and Cedric Richie, he is not a career Scotiabanker. His first job in finance was at employee-owned investment dealer McLeod Young Weir. The firm was a powerhouse in Canadian bond markets, run by traders who thrived on quick market calls, and the rapid-fire culture shaped Mr. Porter's approach to business.

He joined Scotiabank in 1988, when the bank bought McLeod. Two decades later, Scotiabank is still trying to knit together two cultures in its capital-markets arm to win more lucrative investment-banking business. It consistently ranks among North America's largest corporate lenders but lags rivals such as Royal Bank of Canada when it comes to turning credit relationships into broader advisory mandates.

Mr. Porter embraced both worlds. He first emerged as one of several candidates for the top job in the late 1990s, as the head of its equity capital-markets team. Succeeding in the role required close ties to corporate clients, skills honed by investment bankers. It also meant he was responsible for committing significant amounts of the bank's capital to deals, which require a credit officer's tool box. He subsequently served as the bank's chief risk officer, then head of international operations and president.

"Look how he grew up in the bank. He was in the markets advising clients on big deals, doing big trades. Upstairs, these guys are making decisions every minute that count," says Mr. O'Neill, the former chairman. "So he's used to velocity, I guess is the way I'd put it, whereas a lot of the bank isn't used to velocity. And so the speed with which he acted was 100 per cent supported by the board."

There have been plenty of tough decisions to make, not least of which was the jarring overhaul of the bank's employees. But Mr. Porter - a private person who is most often described as decisive, focused and demanding - doesn't see those decisions as personal. To him, business is business, even if many former Scotiabankers resent the way their careers were cut short.

"He's not running the bank for the moment. He's running the bank for the future," says Barbara Mason, a member of Scotiabank's nineperson operating committee and its chief human resources officer.

Ms. Mason has worked at the bank for 37 years - including a stint running wealth management - and adds: "The balance between today and tomorrow is different under Brian's watch. The balance of today and tomorrow in previous regimes would have been much more weighted toward today."

PRUNING BRANCHES For ages, Scotiabank has pegged its brand to being Canada's most international bank, with a history that goes back to 1889, when it ventured into the Caribbean to finance trade in sugar and rum. By the time Mr. Porter took over as CEO, the bank was in 54 countries spanning 17 time zones. It had planted many of these flags opportunistically, taking minority stakes in foreign banks and opening outposts to follow clients as they did business abroad.

The strategy landed it in countries such as Turkey, Egypt, Venezuela and Russia. Occasionally, it landed the bank in deep trouble, such as with its investment in one of Argentina's largest commercial banks. In 2002, after the country defaulted on foreign debt, Scotiabank walked away, incurring a $540-million writedown. More recently, the bank has all but written off its 26-per-cent stake in Venezuela's Banco del Caribe and barred employees from travelling to the country, amid an economic collapse and political unrest Mr. Porter calls a "human tragedy."

In the Caribbean, Scotiabank still holds a commanding position.

But several of the region's economies have fallen on hard times and have restructured sovereign debt in recent years. And the island countries remain vulnerable to a range of risks, including climate change and money laundering.

Before the global financial crisis, when regulations were looser and banks had access to plentiful capital and liquidity, a strategy to plant flags in far-flung locales was defensible. The assets were profitable and helped the bank stand out from its Canadian peers. But after the crash, regulators required banks to hold more capital and liquidity, and the costs of complying with local rules in dozens of markets increased. Under new rules, banks were required to deduct minority stakes in other banks from their capital requirements, making it more punitive to hold the investments. Suddenly, aspects of Scotiabank's vast reach started to look as if they were liabilities.

Mr. Porter set about pruning the bank's international ambitions.

The idea was to double down in four Latin American countries where Scotiabank believed it could be a real player: Mexico, Peru, Chile and Colombia. With combined populations of 230 million people and a growing middle class, Mr. Porter saw the potential for higher returns than Scotiabank could earn in North America or Asia. Net income after taxes from international banking has grown 82 per cent since 2013, both by acquisitions and internal growth.

Scotiabank's boldest move to bolster its Latin American business on Mr. Porter's watch was a $2.9-billion deal to acquire control of rival bank BBVA Chile from Banco Bilbao Vizcaya Argentaria SA. Previously, it had also outmanoeuvred BBVA to buy a controlling interest in Peru's Banco Cencosud, making Scotiabank that country's secondlargest credit-card issuer.

In 2018, 85 per cent of Scotiabank's profits came from Canada, the United States and those four Latin American countries. It now has more Spanish-speaking employees than English speakers and is the third-largest bank in Peru and Chile. But without additional acquisitions, it could be years before Scotiabank reaches the 10-per-cent market share it aspires to have in Mexico and Colombia, where it ranks sixth and fifth, respectively.

At the same time, Scotiabank sold assets it didn't consider vital in the Dominican Republic, El Salvador and Thailand, among other countries, and pulled out of nine Caribbean countries. That pared its global presence to 36 countries, and it has cut its assets in Asia by half to divert capital elsewhere.

"We exited what we thought were higher-risk jurisdictions for all the reasons you read about in the paper, whether it's geopolitics, AML [anti-money laundering], operational risk, et cetera," Mr. Porter says.

"We could get a better return deploying that capital in Canada, the U.S.

or Latin America."

Even so, Scotiabank continues to face significant risks from its Latin American operations. Simmering trade tensions, volatile commodity prices and a crackdown on banking fees by Mexico's new leftist President, Andres Manuel Lopez Obrador, have clouded the bank's outlook in Latin America. But there are also structural challenges, as economic growth has dipped in those markets.

Money laundering also remains a major red flag. Scotiabank spends about $300-million annually to stem the flow of illicit funds across its network and has been working to set the same standards and controls in every country it does business. Mr. Porter is keenly aware of the damage done to Nordic lenders Danske Bank and Swedbank after lapses in anti-money laundering controls.

Some major banks such as Citigroup Inc. have retrenched from Latin America in the face of those risks. But Scotiabank believes it has chosen markets that are more resilient to economic and political cycles, with stronger democratic institutions, independent central banks and increasing openness to foreign investment. Mr. Deschamps says: "We operate in higher-risk markets, but also well-compensated by price. Our risk-adjusted margin is higher."

Even so, many investors still attach a higher risk rating to Scotiabank's international operations, "and I think they should," says Steve Belisle, senior portfolio manager at Manulife Asset Management, which has been buying Scotiabank shares of late. "[They're] higherrisk jurisdictions. But the key markets where they are, I think, generally are less risky than, say, Brazil, Argentina, Venezuela. The markets where they are are well-selected."

Mr. Porter knows he still has work to do to win over investors. In 2016, the bank hosted an investor day in Mexico City to give institutional shareholders a close-up look at the region. This fall, it will host a similar session in Santiago, Chile's capital. "That's our job: We've got to spend more time educating the investment community at large about the potential of our Latin American businesses," Mr. Porter says.

TROPHY ASSETS The tough work in the early years of Mr. Porter's tenure - which included cutting $1.2-billion in costs, some of which was reinvested in digital initiatives - made Scotiabank more efficient, which in turn helped it generate more capital and build an impressive war chest.

Early in 2018, it had the highest capital ratios of any Canadian bank.

But it still wouldn't be enough to digest the flurry of deals to come.

The first shoe to drop was the BBVA Chile transaction, which closed last year. It doubled Scotiabank's share of Chile's banking market to 14 per cent, adding $29-billion in assets, 4,000 staff and 127 branches.

The deal promised Scotiabank a leap forward in a key country and the bank laid out a detailed, day-by-day plan to merge the two businesses, making it easy for investors and analysts to digest.

Mr. Porter and his team then turned their attention to wealth management - an acknowledged weak spot relative to other banks, made even smaller after Scotiabank unloaded most of its 37-per-cent stake in fund manager CI Financial Corp. Less than three months after announcing the BBVA deal, Scotiabank bought independent asset manager Jarislowsky Fraser Ltd. for $950-million to get stronger in its asset-management business tailored to institutional-investor clients.

That deal never went to auction and was the fruit of careful cultivation: Mr. Porter and Charles Emond, a senior investment banker who has since left Scotiabank, repeatedly courted the firm's venerated founder, Stephen Jarislowsky. At the time, Scotiabank noted that asset managers with rosters of institutional clients are hard to come by - and more readily bought than built from scratch.

Less than four months after that, Scotiabank was back with another splash, shelling out $2.6-billion to buy MD Financial Management, a wealth manager that caters to doctors. "We were kind of surprised on the timing when it came to market," Mr. Porter says. As with BBVA Chile and Jarislowsky, he considers MD a "trophy asset" because it came with an extensive set of high-net-worth clients with complicated wealth-management needs, from medical school to retirement.

And buying MD added to the bank's existing franchise as a prominent financial adviser to dentists - for years, there's been an escalator in Scotiabank's main Toronto branch that whisks clients who are medical professionals to dedicated offices on the second floor.

Mr. Porter calls Jarislowsky and MD "cornerstones" of Scotiabank's revamped wealth-management business. Traditional money management is changing, as passive investing puts pressure on fees just as baby boomers reach retirement age. But Jarislowsky and MD give Scotiabank a foothold with customers who are harder for competitors to dislodge: Institutional investors and high-earning doctors who often run their own practices. And Mr. Porter is already musing about exporting MD's physician-focused strategy to other countries, such as Mexico.

"We're the third-largest active asset manager in the country and we've got a whole suite of products that go along with that, so we are really pleased with what we've done," he says.

Not everyone is happy. Some doctors voiced concerns about a bank absorbing what had been an independent wealth manager. Scotiabank has spent considerable time reassuring MD clients, but rivals sense an opportunity: Toronto-Dominion Bank and Canadian Imperial Bank of Commerce have both rolled out wealth-management offerings targeting physicians.

Some investors were also less impressed. The expenditures arrived in quick succession, forcing Scotiabank to issue roughly $1.7-billion in stock to help pay for MD. The new businesses won't make a significant contribution to the bank's profits for at least two years, a reflection of the premium price and financing costs of the acquisitions, and many investors operate on far shorter timelines. The decision to sell equity was a marked contrast to that of rival Canadian banks, which were buying back shares and reaping hundreds of millions of dollars in benefits from U.S. tax cuts.

The deals also made Scotiabank less predictable. For years, Bay Street analysts joked that BNS stood for Bank of No Surprises. Quarter after quarter, its profits would modestly exceed analysts' expectations. But on Mr. Porter's watch, capital markets became more volatile and Scotiabank made occasionally chunky investments in technology and acquisitions. On occasion, it surprised markets by falling short on forecast profits and investors punished the bank.

Some shareholders also question the steep price it paid to secure MD - 5.3 per cent of assets under management, well above a typical range of 1 per cent to 3 per cent for Canadian money managers. And to Manulife's Mr. Belisle, the expected return from the Jarislowsky deal seems "questionable" - he can't model the rate of return Scotiabank has projected without using "very optimistic assumptions."

"Integration of asset managers is always very difficult. You lose people, you lose assets. So I can't really see the benefits to the bank of doing that deal and I think the market punished the stock a lot for that," Mr. Belisle said. "It's just a bad move from a capital-allocation perspective."

He's "less negative" on the MD acquisition but knows "some investors didn't like it either." After the deals, Scotiabank's share price, which had already lagged that of other Canadian banks, fell further behind the group - it trades at a multiple of about 10 times price to earnings, compared with an average of roughly 11 times among the other big banks.

"I think the next 12 to 18 months will be very important to assess what [Mr. Porter] has been able to do," he says.

Scotiabank is now pouring its energy into integrating the new businesses and pursuing organic growth. But even if Mr. Porter has made the right calls, the full benefits may not be immediately apparent.

"The bank has taken on some strategic change and there's some risk incrementally to the bank's strategy. So the market increases your cost of capital for a period. And that happens over and over again" in banking, says Robert Wessel, managing partner of financials-focused asset manager Hamilton Capital.

To improve its stock price and price-to-earnings ratio, Scotiabank will need to show its international business can continue to grow rapidly, it can weave together its new wealth-management assets to form a serious competitor and its core Canadian business can produce steady results by boosting revenue and smoothing out expenses.

In the meantime, Mr. Porter has no qualms about being held accountable for his decisions. "I think that the share price will take care of itself. We're not buying anything else. The noise will calm down on divestitures," he says. "It comes with the territory."

Associated Graphic

FISCAL UNDER ASSETS MANAGEMENT, YEARS, ASSETS FISCAL YEARS UNDER MANAGEMENT

Scotiabank CEO and president Brian Porter's great-grandfather Hector McInnes was a director at the bank, as was Mr. McInnes's son, Donald.

CHRISTOPHER KATSAROV/THE GLOBE AND MAIL


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The Scotiabank remake
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By JAMES BRADSHAW, ANDREW WILLIS
  
  

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Saturday, May 25, 2019 – Page B1

At Bank of Nova Scotia, Brian Porter has upended a cozy culture, pushed out long-time executives, spent billions on new acquisitions and dumped parts of its much-touted international division. Now if only the stock market would buy his plan. James Bradshaw and Andrew Willis report B6

Associated Graphic

Brian Porter won the top job in November, 2013, with a mandate to retool Scotiabank.

CHRISTOPHER KATSAROV/THE GLOBE AND MAIL


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Banks expected to lose millions after Corus deal fails to sell
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By ALEXANDRA POSADZKI, TIM KILADZE, ANDREW WILLIS
  
  

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Friday, May 24, 2019 – Page B1

A syndicate of investment banks is expected to lose tens of millions of dollars after repricing a secondary offering of Corus Entertainment shares due to lowerthan-expected demand.

The syndicate of underwriters, led by TD Securities, has repriced the offering of Class B Corus shares to $6.25 each, down from $6.80, according to people familiar with the matter and documents obtained by The Globe and Mail.

The estimated hit to all of the banks in the syndicate is expected to be roughly $24-million, according to a source familiar with the matter, an unusually large loss for a bought deal. The estimated loss to TD Securities is roughly $7-million.

The original deal size was expected to be 80.6 million shares for total proceeds of around $548-million, but roughly twothirds of the deal didn't sell, according to sources, to whom The Globe granted anonymity because they are not authorized to speak publicly about the matter.

Shaw Communications Inc. announced a deal on May 14 to sell its 38.6-per-cent stake in Corus to the syndicate after struggling to sell the position to a single buyer last year. The deal was priced at $6.80 per Class B share, representing an unusually large 15.6-per-cent discount to Corus's closing price. Typically, such bought deals are sold at a discount of between 2 per cent to 4 per cent. In a bought-deal arrangement, members of the syndicate buy the shares in order to resell them to various investors and earn a commission, but they take the risk that weak demand could leave them stuck with unwanted shares and losses.

Corus owns the Global Television Network as well as a number of specialty television channels such as HGTV Canada and Food Network Canada.

The Corus shares proved difficult to sell because investors are skeptical about the outlook for TV advertising spending, a key element of the broadcaster's future revenue, according to investment bankers working on the transaction. There were also concerns about buying into a media company when Shaw, a long-standing player in sector, is exiting.

Other banks in the syndicate include CIBC World Markets and RBC Dominion Securities, with each representing 12.5 per cent of the deal, and Scotia Capital, BMO Nesbitt Burns and National Bank Financial at 5 per cent each. Spokespeople for TD Securities, National Bank, CIBC and Scotiabank declined to comment and other banks in the syndicate could not immediately be reached for comment.

TD Securities hopes that repricing the shares at a lower level will boost demand from both institutional and retail investors, according to a document obtained by The Globe. But if that demand fails to materialize, TD could be left with millions of shares, according to the document.

Shaw Communications will not be affected as it has already received $6.80 a share for its Corus stake.

Losses of this magnitude are rare on Bay Street, but they have been seen before.

In one instance, in 2015, when a $1-billion bought deal for Silver Wheaton failed to sell, estimates pegged losses suffered by Scotia Capital, the lead underwriter, at between $5-million and $10-million.

Investment banks pitched Corus shares to clients as a play on a recovery in television advertising. The company used an investor presentation in late April to highlight a 5-per-cent increase in revenues from its networks and a 10-per-cent increase in profits from the TV division, which made $114-million in the most recent quarter.

BCE Inc., owner of rival network CTV, also talked up rising advertising sales at its TV properties as part of its most recent financial results.

Shaw sold its Corus shares as part of a strategic shift that is seeing the Calgary-based company focus on expanding its wireless and cable businesses. Shaw acquired the Corus shares in 2016 as payment for broadcasting assets, including Global, sold by the telecom company. Shaw previously spun out Corus as an independent entity in 1999. Both companies are controlled by the Shaw family.

CORUS ENTERTAINMENT (CJR.B) CLOSE: $6.55, DOWN 6¢


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Changes to Canada's airline industry are good for business travellers - and bad for the rest
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Saturday, May 18, 2019 – Page B1

Canada's two largest carriers are remaking the country's airline industry and the wheeling and dealing isn't expected to stop until there's a new owner for Porter Airlines Inc.

Porter, the Toronto-based regional carrier with the raccoon logo, is in the enviable position of being a perfect complement to the country's second-largest player, WestJet Airlines Ltd., which agreed to a friendly $3.5-billion buyout from private-equity firm Onex Corp. last Monday.

The case for consolidation grew stronger on Thursday, when market leader Air Canada announced it's in exclusive talks to acquire charter company Transat A.T. Inc. for $520million.

These two takeovers are driven by WestJet and Air Canada's shared goal of putting more business travellers in their planes.

The acquisition of Transat and any potential deal involving Porter hold no joy for the rest of the flying public. Airline consolidation in a country that limits access for foreign carriers is going to mean less competition, in the form of fewer seat sales and higher ticket prices.

After announcing an offer for WestJet, Onex managing director Tawfiq Popatia said his company had no plans to stage what the private-equity types call a "roll up" strategy by moving quickly to snap up smaller rivals. And at Porter, spokesman Brad Cicero said the two recent deals "highlight general investment interest in the airline industry, but have no direct impact on Porter's business. Porter is not considering a sale process."

However, in finance circles, there is widespread expectation Onex's long-term plan for transforming WestJet into a far more serious competitor to Air Canada will involve additional acquisitions.

Calgary-based WestJet's potential interest in Porter starts with the airline's network across the eastern United States, Ontario, Quebec and the Atlantic provinces.

These are high-volume destinations, and Canada's financial centre is minutes away from Porter's main hub at Billy Bishop Toronto City Airport.

For business travellers, convenience counts.

Convenience is an issue when New York-bound passengers book a Porter flight. Their planes are routed through the airport in Newark, N.J., easily an hour from Manhattan. WestJet could shift those flights to its eight existing slots at a far more convenient airport, New York's LaGuardia, which is currently getting a long-overdue renovation.

The logistics of a partnership between Porter and WestJet work well. The two carriers already fly the same plane - the 80-passenger, propeller-driven Bombardier Q400. And both airlines can claim a customer-friendly service culture.

It's worth noting that Porter has been up for sale in the past. Its owners are founder Robert Deluce and his family - son Michael Deluce took the reins as CEO last month - along with private-equity investors Edgestone Capital Partners and the Ontario Municipal Employees Retirement System, or OMERS. The group attempted to take the company public in 2010, but pulled the offering when they couldn't get the price they wanted, opting instead to sell the terminal in Toronto for an estimated $700-million.

Looking further ahead, Porter has long lobbied for permission to fly jets from Toronto's island airport. To date, the federal government has nixed the idea. But if a new generation of quieter jets is allowed to take off and land at Billy Bishop - a move endorsed by Ontario Premier Doug Ford - it would dramatically increase Porter traffic through Toronto. That sort of game-changing shift is straight out of the private-equity playbook followed by investors such as Onex. An equally seismic shift would result from allowing foreign airlines greater access to the domestic market, or the opportunity to own a Canadian carrier.

The history of Canadian aviation is filled with airlines that soared for a time, only to hit turbulence and be sold to stronger rivals. That list includes Wardair, Pacific Western, Canadian Airlines and Air Ontario, which the Deluce family sold to Air Canada in 1986. The current round of consolidation is notable because it will see two deep-pocketed carriers with strong leaders - Air Canada under CEO Calin Rovinescu and founder Gerry Schwartz at Onex - vying to dominate the domestic skies. It's a corporate battle that will captivate Bay Street and benefit the business flier, and leave the rest of us paying more to check our baggage.


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BMO chops 100 capital markets jobs as part of cost-cutting
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By JAMES BRADSHAW, ANDREW WILLIS
  
  

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Friday, May 17, 2019 – Page B1

Bank of Montreal is trimming the ranks of its capital-markets arm, eliminating approximately 100 jobs as the bank continues to hunt for ways to control its costs.

The job cuts were announced internally over the course of a few days this week, according to sources who were granted anonymity by The Globe and Mail because they were not authorized to discuss the changes. The job losses span a range of divisions and seniority levels in Canada and the United States, as well as in other countries where BMO does business.

In April, BMO revamped the leadership of its capital-markets team, as four senior bankers left. And that shuffle came six months after Dan Barclay was installed as chief executive officer of BMO Nesbitt Burns Inc., succeeding Pat Cronin, who had been promoted to be BMO's chief risk officer.

Like many of its peers, BMO had to weather volatile conditions for capital markets at the tail end of 2018 and while markets have calmed since then, the division continues to face a challenging climate.

In its first fiscal quarter, which ended Jan. 31, BMO reported a 6-per-cent drop in profit from capital markets, compared with a year earlier - and that stood out as a good result relative to several other major banks.

BMO is also in the midst of a bank-wide drive toward greater efficiency that has been a key priority for chief executive Darryl White, who is himself a former head of the capital-markets division.

BMO's efficiency ratio, which measures expenses as a percentage of revenue, is above 60 per cent, trailing other large Canadian banks by a wide margin.

"Our strategy is clear and unchanged and will continue to be client driven. From time to time, we make adjustments to align with the current market environment," a BMO spokesperson said in a written statement.

As of the end of January, BMO Capital markets had 2,747 fulltime equivalent employees, up from 2,375 two years earlier.

As part of its efficiency drive, BMO has been scrutinizing every corner of the bank, from staffing levels to procurement contracts.

And while Mr. White has declined to project what that will mean for BMO's total headcount, he said at the bank's 2018 annual shareholders meeting that "I don't think it'll be a heavier bank going forward, put it that way."


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Corus shares sink after Shaw sells its stake
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Telecom's move is part of strategic shift to focus on wireless, cable businesses
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By ANDREW WILLIS
  
  

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Thursday, May 16, 2019 – Page B2

Investors gave a cold reception to the $548-million sale of Corus Entertainment Inc. stock, knocking back the stock price by 17 per cent on Wednesday, a day after Shaw Communications Inc. cut ties with the Toronto-based broadcaster.

Shaw announced late on Tuesday it sold its entire 36.8-per-cent stake in Corus to a syndicate of 13 investment banks led by TD Securities Inc., which in turn offered the stock to investors for $6.80 a share. The sale was priced at a 15.6-per-cent discount to the closing price of Corus stock on Tuesday, a larger cut in price than the 2-to-4 reduction typically seen on what are known as "bought deal" financings. Corus shares closed Wednesday at $6.70 on the Toronto Stock Exchange, down $1.36 from the previous session.

Investment banks pitched Corus shares to clients as a play on a recovery in television advertising, after the company used an investor presentation in late April to highlight a 5-per-cent increase in revenues from its networks and a 10-per-cent increase in profits from the TV division, which made $114-million in the most recent quarter. Corus owns the Global Television Network and a slate of specialty TV channels, such as Food Network Canada and HGTV Canada. BCE Inc., owner of rival network CTV, also talked up rising advertising sales at its TV properties as part of its most recent financial results.

Shaw sold its Corus shares as part of a strategic shift that is seeing the Calgary-based company focus on expanding its wireless and cable businesses. Shaw attempted to find a single buyer for the Corus stake last year, but was unsuccessful. On Wednesday, one banker working on the sale called it a cleanup of Shaw's most recent involvement in Toronto-based Corus.

Shaw acquired the Corus shares in 2016 as payment for broadcasting assets, including Global, sold by the telecom company. Shaw previously spun out Corus as an independent entity in 1999. Both companies are controlled by the Shaw family.

Corus shares are relatively thinly traded and the 81 million shares sold on Tuesday represent approximately 80 days of the company's average turnover on the Toronto Stock Exchange.

Sources working on the transaction, to whom The Globe and Mail granted anonymity because the deal has not closed, said Corus has a relatively large following among individual shareholders and reaching out to these investors means the sales process is expected to take several days.

While Corus stock is trading below the price of the offering, the investment banks still stand to make a profit on the transaction, as there is a $22-million fee on the transaction, or 27 cents a share. This commission means Corus's share price would need to fall below $6.53 before the banks lose money on the deal.

The transaction is expected to close on May 31.

Shaw's decision to unload its stake in Corus is the latest in a series of what are known as secondary share offerings from long-time backers exiting public companies. In March, the founder of Northland Power Inc. sold a $750-million stake in the company, after Northland shut down a strategic review the previous year without finding a buyer for the company. In addition, a private-equity fund recently sold a $437-million stake in retailer Aritzia LP and a foreign real estate company raised $1.2-billion by selling the bulk of its holding in First Capital Realty Inc.

CORUS (CJR.B) CLOSE: $6.70, DOWN $1.36 SHAW (SJR.B) CLOSE: $26.73, DOWN 48¢


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Shaw resorts to secondary offering to sell Corus stake after failing to find a single buyer
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Wednesday, May 15, 2019 – Page B1

Shaw Communications Inc. is unloading its 38.6-per-cent stake in Corus Entertainment Inc. in a $548million share sale, after struggling to sell the position to a single buyer last year.

The offering, announced after the market closed on Tuesday, is priced at $6.80 per Class B share, representing a 15.6-per-cent discount to Corus's closing price. Corus is the owner of the Global television network and a slate of specialty TV channels, such as Food Network Canada and HGTV Canada.

Typically, share sales are sold at a discount of between 2 per cent and 4 per cent to market prices, yet the circumstances of this deal are unique.

Chiefly, the offering comes after Shaw hired a financial adviser in 2018 to try to sell the position to a strategic buyer, such as Rogers Communications, or to a private equity firm. After an exhaustive search, the effort proved fruitless - partly because foreign-ownership restrictions prevented any non-Canadian buyers from acquiring the stake on a path to full control of Corus.

Months later, Calgary-based Shaw is now selling its stake to public investors by way of a bought deal. Under this model, investment banks led by TD Securities will buy the entire position and then resell the shares to institutional and retail investors.

The discount is a reflection of both the size of the stake, as well as Corus's ownership structure.

After the sale, Shaw Communications will not own any Class A or Class B shares of Corus - yet the Shaw family will continue to control Corus through its ownership of Class A shares.

Shaw and Corus both declined to comment for this story.

The offering also comes on the heels of a strong run for Corus's share price, with the stock up 69 per cent since the start of the year. Corus blew away analyst expectations when it last reported quarterly earnings in April, delivering an 11-per-cent lift in TV advertising revenue.

"This transaction is a positive for Shaw, given the capital that will be required to expand its wireless network and acquire high-band spectrum in preparation for 5G," Canaccord Genuity analyst Aravinda Galappatthige wrote in a note to clients.

Shaw's decision to unload the stake in a public offering marks the latest chapter in a dynamic relationship between Shaw and Corus. In 1999, the Shaw family spun out Corus to make Shaw Communications more of a pure play on cable.

Yet in 2010, Shaw ended up acquiring more media holdings by paying $2-billion to purchase CanWest Global Communications Corp.'s broadcast assets after that company's restructuring.

The deal gave Shaw control of the Global Television network, as well as Food Network Canada, HGTV Canada and Showcase.

In 2016, the Shaw family decided to shake things up again, with Shaw Communications selling its media division to Corus for $2.65-billion to help pay for its acquisition of wireless startup Wind Mobile. The purchase came in two parts: $1.85-billion in cash, and 71 million Corus class-B nonvoting shares at $11.21 per share.

The Class B shares included are those now being sold to public investors - albeit at a much lower price.

The price drop reflects the tough market for television networks. When Corus acquired Shaw Media three years ago, it made a bet on the power of women, believing that owning all six of the top six specialty channels watched by women would attract advertisers. Women tend to make their households' spending decisions.

The deal was also a bet on content, which can be distributed or syndicated. On a conference call to discuss the purchase in 2016, Corus CEO Doug Murphy said there was a "content-hungry global marketplace."

But Corus has struggled since because fewer people gather around television sets at the same time, which makes advertisers wonder whether TV ad buys are worth it. Facebook and Google have also gobbled up much of the ad money devoted to digital and social-media channels.

Corus's balance sheet had also been weighed down by some $2billion in debt. Under financial stress, the company slashed its dividend in June, 2018, and also took a $1-billion impairment charge.

Lately, though, Corus has surprised analysts. For the quarter ended Feb. 28, its television ad revenue was surprisingly strong, and the share price has popped 25 per cent since. Shaw is selling its stake into this rally.

Mr. Murphy is hoping to build off the recent momentum, saying on a conference call in April that digital companies such as Trivago, Expedia, Amazon and Google are all seeing the value in TV ads. "I mean that guy on Trivago, the reason why you see him all the time is because television advertising works," he said on the call.

He also flagged a recent study conducted by Accenture consultancy that was commissioned by industry group ThinkTV, which argued that advertisers across four key segments - automotive, consumer packaged goods, overthe-counter drugs and telecommunications - are overspending on digital. The study called for a correction in spending - more on TV, less on digital.

With reports from Christine Dobby and Susan Krashinsky Robertson SHAW (SJR.B) CLOSE: $27.21, DOWN 7¢ CORUS (CJR.B) CLOSE: $8.06, UP 9¢


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Fox Corp.'s 'insanely simple' bet on sports wagering
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U.S. media mogul Murdoch sees gambling as the next big wave in the industry, and he's taking Canada's Stars Group along for the ride
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Saturday, May 11, 2019 – Page B3

Rupert Murdoch unveiled his vision of the future of entertainment this week, and it was tied to the potential of Canada's largest online gambling company.

In what the 88-year-old media mogul described as a strategic "pivot" for Fox Corp., the global media company, Mr. Murdoch announced a U.S. sports wagering platform called Fox Bet on Thursday in partnership with Toronto-based Stars Group Inc., best known as owner of the PokerStars website.

Fox spent US$236-million for a 5-percent stake in Stars Group, Mr. Murdoch's first significant move after selling his Hollywood studios and TV stations to Walt Disney Co. for US$71-billion.

The deal, unveiled as the centrepiece of a Fox investor day, signals how Mr. Murdoch expects audiences to interact with sports in the future. The investment also establishes Stars Group - formerly known as Amaya Inc. - as a leading player in North American sports wagering. Stars Group's stock price jumped 14 per cent after the venture was announced, adding $1-billion to the value of the company.

If Mr. Murdoch has it right, in the nottoo-distant future, a fan would tune in to Game 7 of a Toronto Raptors playoff series, for example, and use Fox Bet to wager on which basketball team will win and the point spread, while taking in the action. His son, Lachlan Murdoch, the chief executive of Fox, called the strategy "insanely simple" at Thursday's session. He said: "We outpunch competitors in the amount of live television we deliver to American households."

Where media companies such as Disney, AT&T Inc. and Netflix Inc.

see the future in streaming movies and TV series such as Game of Thrones to viewers, Fox believes it can attract eyeballs with a mix of sports and news. The network broadcasts baseball, auto racing, soccer and the top-drawing programming on television, NFL football.

Fox and Stars Group are first movers in a U.S. market that opened up last year, when the U.S. Supreme Court allowed states to legalize sports gambling. Fox executives said they expect Americans to bet US$9-billion online annually by 2025, a projection that may prove conservative, as "illegal" wagers on the NFL's Super Bowl total an estimated US$5-billion.

While the U.S. venture is breaking new ground, sports betting is familiar territory for Stars Group in Europe. The company paid US$4.7-billion last April to acquire Sky Betting and Gaming, the dominant British online wagering platform. British fans look to Sky for games such as Soccer Saturday Super 6, a free contest that sees participants snag cash prizes for picking six winning teams. Sky also lets clients wager on matches - this in a country where punters bet on everything from Manchester United to the names of Royal Family babies. The same two-tiered approach - free contests and bets on games in states that allow gambling - is expected to be rolled out in the United States in time for the NFL's kickoff in September.

"Stars Group clearly has the operational ingredients for success while Fox has the strategic reach and customer resonance," said a report on Friday from British gaming consultant Regulus Partners. "While there is certainly risk to changes in sports content consumption ... the Fox deal makes Stars Group a very credible massmarket contender in the U.S."

The potential audience for sports betting is huge; broadcasts by Fox Sports reach 100 million Americans. Only ESPN is in more homes, but the Disney-owned network has historically been reluctant to embrace sports gambling, which should leave the sports gaming field relatively clear for Stars Group. The Canadian company struck a 25-year alliance with Fox, and the deal gives Mr. Murdoch the right to acquire up to 50 per cent of Stars Group's U.S. business over the next 10 years.

The costs involved are also huge: Stars Group lost US$109-million last year on revenues of US$2-billion as it grew its European operations. Regulus Partners said Stars Group is now at the forefront of an emerging U.S. sports gaming industry, but then added: "We would caution, however, that this emergence is still likely to be long, fiddly and financially draining for most protagonists for some time to come."

Mr. Murdoch has successfully surfed media for six decades, deftly moving from newspapers in his native Australia into television, film and professional sports. He and his son see gambling as the next big wave, and they are taking Stars Group along for the ride.

Rafi Ashkenazi, chief executive of Stars Group said: "We believe this strategic partnership uniquely positions us to build a leading betting business in the U.S., which represents one of the most exciting longterm growth opportunities for our company."


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Ontario to gain an extra $13-million a year after Hydro One increases dividend payment
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Friday, May 10, 2019 – Page B1

At Hydro One Ltd.'s last annual meeting, Progressive Conservative candidate Doug Ford joined protesters on the sidewalk outside the gathering to attack the utility's CEO and his $6-million pay package.

Mr. Ford, now Ontario's Premier, didn't come to Hydro One's shareholder meeting this year, but the results of his successful, populist campaign were clear.

The utility's new board and boss used the gathering to announce modest growth plans, along with better-than-expected financial results that included a roughly $7-million quarterly dividend increase.

The dividend hike puts an additional $13-million or so into provincial coffers annually, as the Ontario government owns a 47-per-cent stake in the partly privatized company.

Toronto-based Hydro One introduced newly named chief executive Mark Poweska to shareholders at Thursday's meeting, one day before the former BC Hydro executive formally takes the reins.

Mr. Poweska's brief speech focused on serving customers in Ontario - and made no mention of the U.S. expansion strategy introduced by his predecessor, Mayo Schmidt. Speaking in a methodical, friendly tone, Mr. Poweska said he is joining the utility "at a critical time in Hydro One's transformation into a customerfocused and innovative company, focused on safety, driving down costs and delivering great value to customers, communities and shareholders."

His blue suit was decorated with green and purple ribbons in tribute to five Hydro One employees who died on the job in the past two years, as were the lapels of other executives and board members. In response to a shareholder question on potential changes in strategy, the new CEO said he plans to spend the next four months working with the board, employees, major customers and other stakeholders before speaking publicly about his plans.

The job of summing up a year that saw Mr. Schmidt leave and the entire board resign after Mr.Ford's election win, along with the scrapping of a planned $4.4-billion takeover of U.S. utility Avista Corp., fell to Hydro One chairman Tom Woods, who was appointed by the province in August. In response to a shareholder question about the state of Hydro One's relationship with its largest shareholder, Mr. Wood said he was "very optimistic" that the company's leaders can work constructively with the government, adding that the board has an "open dialogue" with Mr. Ford and his team.

After Mr. Schmidt left, the government capped the compensation of the CEO at $1.5-million and cut pay packages for all senior employees. At BC Hydro, a Crown corporation, Mr. Poweska made $405,720 last year. Several Hydro One executives departed this spring, and interim CEO Paul Dobson is expected to leave this summer after just more than a year with the company. On Thursday, the utility named Chris Lopez as chief financial officer.

Hydro One announced Thursday that it made a profit of $311million, or 52 cents a share, in the most recent quarter, excluding $140-million in costs associated with the cancelled Avista takeover, compared with a profit of $210-million, or 35 cents a share, in the same period last year. The results were well above the 45 cents a share forecast by analysts.

Hydro One increased its quarterly dividend by 5 per cent and, in a news release, Mr. Poweska said: "This increase reflects the strong fundamentals of the business and confidence in our continued ability to produce solid financial results."

Hydro One delivers electricity to 1.4 million customers over a 30,000-kilometre network, almost twice the size of BC Hydro's transmission system.

"Hydro One continues to focus on improving operational efficiency," said analyst David Galison at Canaccord Genuity Corp., who raised his target price on the stock to $22 from $21.50. In a report, Mr. Galison said: "The increase in our target price is due to higher earnings, benefiting from lower taxes."

HYDRO ONE (H) CLOSE: $21.72, DOWN 2¢

Associated Graphic

Ontario utility Hydro One reported a profit of $311-million for the most recent quarter, well above analysts' expectations.

TIM FRASER/ THE GLOBE AND MAIL


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Ferrovial, CPPIB expected to match bid for SNC's stake in 407
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Toll road's consistent financial results appeal to institutional investors as they seek alternatives to fixed-income assests such as infrastructure
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Friday, May 3, 2019 – Page B2

Spain's largest construction company and Canada's biggest pension plan are expected to increase their stakes in Ontario's Highway 407 by matching a $3.25-billion offer for SNC-Lavalin Group Inc.'s holding in the toll road, a move that demonstrates the value of infrastructure to institutional investors.

Montreal-based SNC struck a deal in early April to sell 10 per cent of the 108-kilometre highway to the Ontario Municipal Employees Retirement System (OMERS) pension plan for $3-billion, with an additional $250million of performance-based payments. SNC plans to use a portion of this cash to pay down debt and will continue to hold a 6.8-per-cent stake in the highway.

The two other shareholders in Highway 407 - Spain's Ferrovial SA with 43.2 per cent and the Canada Pension Plan Investment Board (CPPIB) with 40 per cent - have the right to match any offer for the SNC stake, an option that expires after 30 days.

SNC announced financial results on Thursday and said in a news release that it "has been informed that a Highway 407 ETR shareholder may exercise its right of first refusal."

Ferrovial, which has a $24-billion market capitalization, and the $368-billion CPPIB have not disclosed their plans, but sources familiar with the negotiations who were not authorized to speak on the record said the two investors are expected to each take a portion of SNC's stake in Highway 407. The toll road consistently turns in strong financial results, with revenues that rise in step with inflation and predictable maintenance costs.

A spokesperson for CPPIB declined to comment Thursday on the fund's intentions for its Highway 407 investment, and a Ferrovial spokesperson also declined to comment. During a conference call on Thursday, SNC chief executive Neil Bruce said while the identity of the buyer of its stake is still being decided, binding contracts struck with OMERS, Ferrovial and CPPIB ensure the Highway 407 sale will close in June.

Institutional investors such as pension plans are buying infrastructure such as toll roads as an alternative to fixed-income investments. CPPIB has approximately 8 per cent of its assets, or $28-billion, invested in infrastructure, up from a $15-billion investment in the sector in 2015.

OMERS, a $97-billion fund, owns about $18-billion of infrastructure and earned a 10.6-per-cent return from the portfolio in 2018, compared with a 1.8-per-cent return on its fixed-income investments.

If Toronto-based OMERS loses out on its planned investment in Highway 407, the pension plan will walk away with approximately $80-million for its troubles.

On Thursday, SNC said if the sale to OMERS does not go forward, it will pay the fund a "break fee" of 2.5 per cent of the purchase price.

SNC's decision in April to sell 10 per cent of Highway 407 means the company is parting with a larger portion of its stake in the toll road than the roughly 7 per cent originally planned, underscoring the balance-sheet stress that forced the engineering company to slash its dividend by about 65 per cent earlier this year.

Fund manager Stephen Jarislowsky, a former director of SNC, is pushing the engineering company to hold a shareholder vote on the decision to sell its stake in Highway 407, and said the asset is likely to double in value in the next decade.

Mr. Jarislowsky, founder of Montreal-based Jarislowsky Fraser Ltd., said the toll road "is one of the finest investments that I know, as it is quasi-governmentguaranteed, plus enjoys the full growth of the traffic around Toronto."

SNC faces charges of bribery and fraud related to business dealings in Libya from 2001 to 2011. Federal prosecutors have so far declined to invite the company to negotiate a settlement on those charges in order to avoid a lengthy trial. That decision set off a political row in Ottawa that has cost Prime Minister Justin Trudeau two cabinet ministers, a top aide as well as a senior bureaucrat.

In 1999, the Ontario government sold Highway 407 for about $3.1-billion. The toll road has been significantly expanded over the past two decades. Based on the value of SNC's stake, the highway is now worth $32.5-billion.


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Another cannabis deal, another billionaire investor involved with both companies
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Thursday, May 2, 2019 – Page B6

One of the largest U.S. East Coast cannabis retailers, Curaleaf Holdings Inc., plans to acquire the leading West Coast cannabis-oil producer for $1.27-billion in a deal that features a billionaire investor on both sides of the table and minimal opportunities for independent scrutiny of the takeover.

Curaleaf, which owns 44 stores in 12 states, made an all-stock offer on Wednesday for a private company named Cura Partners Inc. that sells oils under the Select brand and is the market-share leader in four states, including California. Curaleaf, a public company listed on the Canadian Securities Exchange (CSE), is controlled and 30-per-cent owned by executive chairman Boris Jordan, who made his first fortune as an investor in newly privatized Russian companies in the 1990s.

A private equity fund that Mr.Jordan manages, called Measure 8 Venture Partners, owns an 11.5per-cent stake in Cura Partners, based in Portland, Ore., that is now worth more than $150-million. In an interview on Wednesday, Mr. Jordan said the two companies worked to the highest standards of governance. Although he is on the board of directors at both companies, Mr. Jordan recused himself from all discussions of the transaction and he is abstaining from all votes on the offer. He said: "I made an introduction a year ago. I was never involved in negotiations, and all voting is done without me."

This the latest in a series of cannabis transactions to feature insiders investing on both sides of the transaction. Aphria Inc. was targeted by short-sellers in December who said the company overpaid when it spent about $300-million last fall to buy businesses in Jamaica, Colombia and Argentina that were partly owned by the company's executives and long-time backers. After a review requested by the Ontario Securities Commission, Aphria wrote down the value of the newly acquired assets by $50-million in April.

One institutional investor who owns a stake in privately held Cura Partners said this takeover is significantly different from the Aphria transaction, because Cura Partners is controlled and largely owned by sophisticated investors who are totally independent of Mr. Jordan, while Aphria featured the same individuals on both sides of the deal.

Curaleaf had sales of US$88million last year, and Cura Partners sold US$117-million of cannabis oil. Curaleaf shares rose 12 per cent on news of the takeover, closing Wednesday at $14.90 on the CSE, which gives the Wakefield, Mass.-based company a $5billion market capitalization.

When the deal closes, Cura Partners shareholders will own 16 per cent of the combined companies.

As part of the transaction, shareholders in Cura Partners have an opportunity to earn an additional US$200-million, paid in Curaleaf shares, if the company exceeds 2020 sales goals. Cura Partners founder Cameron Forni will join Curaleaf as a board member and president of its Select division. In a press release, Mr. Forni said: "The leading companies in the industry on the West Coast and the East Coast are now joining forces to progress the legalization and mainstream acceptance of cannabis across the country."

Curaleaf's offer makes use of exemptions in Canadian securities law to avoid both a formal valuation of its bid and a vote on the offer by Curaleaf shareholders; the owners of privately held Cura Partners will hold a vote. To deal with governance issues, Curaleaf's board struck a special committee that the company said in a news release was free of conflicts of interest. That committee received an opinion from investment bank Beacon Securities Ltd.

that said the offer is fair to Curaleaf shareholders from a financial point of view, based on "assumptions, limitations and qualifications set forth therein." Curaleaf did not release the fairness opinion.

Law firm Stikeman Elliott LLP is advising Curaleaf on the takeover, along with U.S. firm Loeb & Loeb LLP. Stikeman was also Aphria's legal counsel on its Caribbean and Latin American acquisitions last year. Stikeman is no longer Aphria's law firm of record. On Wednesday, Stikeman declined to comment on the Curaleaf and Aphria transactions.

Curaleaf tapped investment banks GMP Securities LP and Eight Capital as its financial advisers on the transaction, while Canaccord Genuity Corp. and Bayline Capital Partners worked with Cura Partners, along with law firms Dentons US LLP and Goodmans LLP.


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Macquarie's retreat signals a streamlining of investment banking
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The Australian firm's Canadian restructuring is a wake-up call not only for small-cap companies that look to independent dealers for funding, but for the capital-raising community as a whole
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Tuesday, April 30, 2019 – Page B4

Australia's largest investment bank, Macquarie Group Ltd., spent $350million over more than a decade building a brokerage house that was intended to be a force in Canadian capital markets.

On Monday, Macquarie's leaders recognized all their efforts created a domestic dealer suited to fighting the last war, a dubious strategy in both business and combat. In Canada, Macquarie fielded more than 50 equitysales, trading and research professionals, all trained to sell stories to portfolio managers. As more and more funds take a passive investment approach, buying securities based on an algorithm, Macquarie realized it didn't need an expensive team to pitch stocks to computers.

After two years finishing outside the top 20 Canadian dealers in equity league tables, a standard measure of market prowess, Macquarie pulled the plug Monday on its entire 50-plus-employee Canadian institutionalequity platform. The restructuring should be a wake-up call to both small-cap Canadian companies, which traditionally look to independent dealers for capital, and the entire investment-banking community. In equity markets, fighting the last war means losing the current fight for business.

Macquarie, and most other dealers, used to view their institutional-sales desks as a primary point of contact with clients. If a mining company needed $100million to dig a pit or acquire a rival, a banker drafted a prospectus, an analyst wrote a report, the sales team pitched the idea to fund managers and traders moved the stock.

Stricter regulations around roles within dealers and the rise of trading technology revolutionized the industry.

Now, small-cap companies that want to raise both capital and awareness need to step up their own investor-relations efforts, across websites and social media, and ensure their bankers are wired into an increasingly small community of active institutional investors.

And today, the most profitable shops on Bay Street are advisory boutiques such as Infor Financial Group and Maxit Capital, firms staffed entirely by investment bankers, with no equity desks. At the other extreme are the bankowned dealers, which have scaled back their equity-sales and research teams in recent years, and foreign-based investment banks, which house a handful of dealmakers in Canada, backed by trading desks outside the country. That's the model Macquarie is now embracing.

There are only a handful of dealers left in the middle ground here - independent houses with significant equity sales, trading and research teams. There's Raymond James Ltd., which looks to analysts to support significant Canadian wealth-management businesses, and the likes of Cannacord Genuity Group Inc., GMP Capital Inc. and Eight Capital.

The recent boom in financing cannabis companies boosted the fortunes of many independent brokerages houses, but Macquarie was never a factor in underwriting pot producers. Longer term, these dealers face the same challenges in the institutionalequity markets that drove the Australians out of the sector.

Consolidation around the strongest firms is expected to be a continuing theme in domestic investment banking, with experts at the Investment Industry Association of Canada (IIAC) predicting a sector that has 161 firms will soon be home to approximately 100.

In a recent report, IIAC chief executive Ian Russell said, "We anticipate even more firms to leave the business in 2019, given the ratcheting up in operating costs and prospect of an extended period of depressed market conditions and decelerating growth in retail and investment banking revenues."

IIAC's statistics show profits from equity trading at 60 Canadian institutional firms, including Macquarie, fell by 49 per cent last year, to $157-million.

Mr. Russell said current industry trends "will lead to a significant consolidation in the investment industry with the corresponding damaging impact on the competitive diversity in the domestic retail marketplace and capital-raising for small- and mid-sized businesses in public and private markets."


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THE A TEAM
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RBC Capital Markets is becoming the New England Patriots of Bay Street--increasingly, it's them versus all the other investment dealers
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Friday, April 26, 2019 – Page P27

It's time to acknowledge that when it comes to investment banking, RBC Capital Markets is playing in a different league than its Canadian rivals. The deal-making arm of Royal Bank of Canada churned out $8.4 billion in revenue last year, almost as much as its second- and thirdranked domestic competitors put together. In the same way it seems preordained that football's New England Patriots will be Super Bowl favourites every year, it now appears certain that RBC Capital Markets will make far more money than any other Bay Street dealer.

What's the secret to this run? Like the most successful coaches in sports, Royal Bank CEO Dave McKay says staying on top in increasingly complex markets starts with keeping things simple. "The beauty of the capital markets strategy is consistency and what I call the simplicity," he said at a conference in March. "It is [built] around great people, using your balance sheet, creating value, advising and cross-selling, and it takes time to build up those relationships." To use another gridiron adage, it's also about the team, rather than individual superstars. When that teamwork kicks in, it can turbocharge revenues and earnings.

Like many perennial winners, McKay pushes his team to do better each year, too. RBC Capital Markets earned a $2.8-billion profit in 2018, which translated into a healthy 13% return on equity--a performance any other Canadian bank would envy. But McKay isn't measuring his team mainly against Bay Street rivals such as Bank of Nova Scotia, which posted capital markets revenue of $4.5 billion in 2018. Royal Bank is competing against global players such as JP Morgan Chase, which generated $35.4 billion (U.S.) in revenue from corporate and investment banking.

RBC Capital Markets began to pull away from the rest of the Canadian bank-owned dealers in the late 1990s, when it found itself advising many of its Canadian corporate clients on international expansion plans. The division's leaders in that era, including long-time CEO Anthony (Tony) Fell, decided that to stay relevant to those clients, it needed to grow with them abroad, with an initial focus on the U.S. market.

In 2000, Royal Bank spent $1.5 billion (U.S.) to acquire a technologyfocused investment bank, Minneapolis-based Dain Rauscher Corp.

When the tech bubble burst in 2001, Dain Rauscher started losing money. Royal Bank also targeted relatively small growth companies, which was out of step with its focus on large-cap clients in established industries. Veteran real estate banker Doug McGregor was dispatched from the head office in Toronto to Minneapolis to turn things around.

McGregor and his colleagues stuck with a U.S. expansion strategy, but eschewed another acquisition, opting to take a slow-and-steady approach by hiring individuals and some entire teams from U.S. banks.

They did the same with British, French and German rivals in Europe.

If Dave McKay is Royal Bank's head coach, the role of quarterback falls to the 61-year-old McGregor, who's chair and CEO of RBC Capital Markets and head of the bank's investor and treasury services. A champion wrestler in his university days, McGregor looks like he could still pin an opponent, and he is disarmingly blunt and direct.

He says the big-ego Masters of the Universe financiers made famous by author Tom Wolfe were never welcome at RBC Capital Markets. McGregor has hired 31 senior bankers in recent months, and says his goal in every interview has been ensuring the new partners are a "safe" cultural fit, which means "understated and team-oriented."

As the bank has expanded internationally--RBC Capital Markets now has 3,300 employees in the U.S., 2,700 in Canada and 1,300 in Europe--McGregor and his colleagues say the concept of teamwork became more essential. No one player can do everything for large and complex corporations.

Take health care. Derek Neldner, RBC Capital Markets head of global investment banking, says that a generation back, one banker could be the sole contact with a pharmaceutical company. Now, he says, "if you are going to offer serious coverage to a health care client, you need an analyst who can talk authoritatively on medical devices, an expert on pharmaceuticals, one on biotech and so on."

To cover the cost of employing all those specialists, a bank needs global scale, Neldner says. He adds that one of RBC Capital Markets' most significant internal accomplishments in recent years was devising a compensation system that ensures bankers and traders get paid for helping on a transaction even if they don't have direct ties to that client.

RBC Capital Markets' reach now vastly exceeds that of any domestic rival. The firm played a role in $1.5 trillion (U.S.) worth of syndicated loans last year, $74 billion (U.S.) in stock sales and $764 billion (U.S.) in bond offerings for Canadian and international clients.

Teamwork often boosts revenues, which is why McKay fixates on cross-selling. Jonathan Hunter, RBC global head of fixed income currencies and commodities, remembers working on an acquisition in British Columbia for a German client. Along with helping negotiate the deal, RBC arranged debt financing and used derivatives to hedge currency risk. "If our fee was a dollar on a conventional advisory assignment, we were able to earn a buck-sixty here by providing extra services while also doing a better job for the client," Hunter says.

Size and outsized profits in capital markets also bolster the premium valuation for Royal Bank stock, analysts say. "When the waves pick up, we prefer to be on a bigger boat," said CIBC World Markets analyst Rob Sedran in a recent report on Royal Bank. Like the Patriots, in good markets and bad, McKay's team just keeps winning.


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Aritzia's new take on share buybacks inspires First Capital Realty to help shareholder unload $1.2-billion stake
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Monday, April 15, 2019 – Page B2

TORONTO -- The new spring lines from fashion retailer Aritzia Inc. feature a floral-pattern Sunday Best Cropsey Romper that rivals may knock off, along with an innovative $437-million deal for a long-time backer that Bay Street bankers are already emulating.

Aritzia offered a new take on an old-fashioned financing tool, a share buyback, to pave the way for a recent stock sale by private equity fund Berkshire Partners LLC. Within weeks, real estate company First Capital Realty Inc. used the same approach to help a long-time shareholder unload a $1.2-billion stake.

Buybacks are typically unremarkable. They simply see cash-rich companies repurchase and cancel their own stock, returning capital to their owners and boosting earnings per share.

At Aritzia and First Capital Realty, share buybacks served a different purpose. They solved a problem that plagues public companies when significant shareholders - typically founders or private equity funds - cash in their holdings.

These exits typically see the seller forced to accept a price for its shares that is 10 per cent or more below where the stock is trading.

For example, the British and Italian companies that owned a stake in Montreal-based lumber company Stella Jones Inc. accepted a 13-per-cent discount when they sold $877million of stock last July.

Any investor who followed Aritzia knew Berkshire wanted for more than 14 years to move the last of a stake the fund owned. The Boston-based fund has been selling down gradually since Aritzia went public in 2016. The prospect of further stock sales by Berkshire weighed heavy on the share price over the past year, and strong performance from the chain's 90 clothing stores and website never translated into a pop in the stock.

Rather than see Berkshire dump its entire holding into the market, the typical approach, cash-heavy Ariztia offered to buy back $107-million of its own stock from the fund, while Berkshire sold the remaining $330-million of its stake to the public.

In a news release, Brian Hill, founder and chief executive of Aritzia, said, "The repurchase of shares from Berkshire Partners represents a compelling opportunity to deploy Aritzia's capital in a manner that is accretive to shareholders."

By decreasing the amount of stock that public investors needed to soak up, Berkshire was able to sell at a relatively thin 6-per-cent discount to Aritzia's share price the day of the deal. CIBC World Markets, RBC Dominion Securities and TD Securities led the Aritzia deal, along with Stikeman Elliott lawyers.

Ariztia struck a special board committee to bless the transaction, advised by Greenhill & Co. Canada Ltd. and law firm Borden Ladner Gervais LLP. Since the transaction was announced in mid-February, Aritzia's stock price is up 9 per cent, closing Friday at $18.47 on the Toronto Stock Exchange.

Fast fashion is a concept in finance as well as haute couture: Weeks after the Aritzia deal, First Capital Realty (FCR) is using a similar approach to help Gazit-Globe Ltd. sell a $1.2-billion position. FCR was motivated to invest in its own stock because shares in the Toronto-based company traded at a discount to that of rival REITs, owing in part to speculation that Gazit, a mall owner based in Israel, planned to dump its stake.

In a transaction announced in late February and led by RBC Dominion Securities, with legal input from Torys LLP, FCR offered to buy back $742-million of its stock from Gazit at the same time the Israeli company sold $453-million of FCR stock to the public.

Again, a board committee signed off on the transaction, advised by Blair Franklin Capital Partners Inc. and Stikeman Elliott LLP. Gazit sold its stake at a 4-per-cent discount to the price of FCR stock on the day the deal was announced.

Gazit still owns a 9.9-per-cent stake in the Canadian company. Adam Paul, CEO of FCR, said paving the way for Gazit to exit "will bring certainty to FCR's ownership structure." In a vote last Wednesday, 99 per cent of FCR shareholders approved the buyback.

Investment bankers and corporate lawyers can be like kids with Swiss Army knives, always trying out new blades.

This spring, the blade of choice is share buybacks, a previously mundane form of financing that's now being used in ways the Street has never seen before.


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Dear dairy: Saputo may be eyeing a risky move
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Analysts say Montreal company is looking at U.S. milk producer Dean Foods, but they warn a takeover may be poorly received
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Saturday, April 13, 2019 – Page B6

Lino Saputo Jr. and his father have built one of the world's largest dairy companies with a string of more than 30 successful acquisitions. The 52-yearold CEO's next takeover may be his toughest challenge to date.

Just about every analyst who covers Saputo Inc. says a team from the Montreal-based company is currently going through the books of Dean Foods Co., the largest U.S. milk producer and owner of 50 brands of sour cream, butter and ice cream. Dallas-based Dean Foods effectively put up a "for sale" sign in late February by announcing its board is exploring strategic options after posting a largerthan-expected US$374-million annual loss and suspending its common share dividend.

At the same time Dean Foods went on the auction block, Saputo realigned its senior management to deepen its bench of its U.S. operations, which accounted for half of the company's $11-billion in sales last year. In recent presentations to analysts, Mr.Saputo and his executive team pointed out that the company has the financial and operational strength to do an acquisition valued at up to $3-billion. The company declined to comment on any interest in Dean Foods or other potential acquisitions.

Dean Foods is a poster child for all that ails the U.S. dairy industry. Americans drink less milk with each passing year, farmers have excess capacity and retail chains such as Amazon and Walmart are pushing their own brands rather than buying milk from traditional suppliers. The 94-year-old company's sales fell to US$7.8-billion last year from US$9.5-billion four years ago, against a backdrop of cost-cutting and restructuring.

The attraction to a buyer such as Saputo is clear: For all its problems, Dean Foods is a market leader, selling one in three jugs of milk consumed by Americans each day. And the equity is relatively inexpensive, with a market capitalization of about US$200million. In comparison, Saputo dropped $1.7-billion in February to acquire a British company called Dairy Crest Group plc that had sales of $786-million last year, and turned a $257-million profit.

The risks that come with acquiring Dean Foods are equally clear. There is nothing to suggest the U.S. dairy industry will stabilize in the near future, so a new owner may be grabbing a falling knife. And the Dallas-based company is carrying US$887-million of debt, which an acquirer would shoulder. In fact, if credit markets have it right, no buyer will step forward for Dean Foods. The company's bonds are currently trading for 50 cents on the dollar, a discount that signals there's no quick solution to the company's financial problems. Standard & Poor's rates the company a dismal CCC+.

Analysts who follow Saputo are warning that a takeover of Dean Foods, or any U.S. dairy business, may be poorly received by investors, who have awarded the Canadian company a premium valuation in the past based on its operational skills and takeover savvy.

"While we expect Saputo to be part of the process every time major assets come to market, given the strong pipeline of potential transactions globally, we expect Saputo to stick to its playbook to extend its footprint in growing and attractive milk sheds" or regions, said a recent report from analyst Irene Nattel at RBC Capital Markets. Right now, the U.S. milk market is neither growing nor attractive.

Saputo is also seen as a potential bidder for U.S. sour cream and cottage cheese maker Breakstone. Owner Kraft Heinz Co. is reported to have put it up for sale as part of a larger restructuring of the company, with an estimated price tag of US$400-million.

"Mergers and acquisitions remain a key part of the Saputo strategy," said a team of four CIBC World Markets analysts in a recent report. "We expect ongoing activity and management highlighted that several of the deals it is looking at today are material."

The CIBC team went on to say: "While challenging macro dairy conditions could lead to opportunistic deals, it also limits the near-term upside from a transaction.... The [U.S.] market remains challenged by oversupply, while other cost and regulatory issues only add to the pressures."

For acquisition-focused companies such as Saputo, the timing of a takeover is rarely ideal. More often than not, a market leader such as Dean Foods only comes up for sale during a downturn, or when it faces financial distress.

For the chief executive, it's time to decide if owning a dominant milk producer is worth the risk that comes with increased exposure to a U.S. dairy industry that's in disarray.

Associated Graphic

Saputo CEO Lino Saputo Jr. and his father have created one of the biggest dairy companies in the world with more than 30 successful acquisitions. In presentations to analysts, Mr. Saputo said the company could handle an acquisition valued at up to $3-billion.

RYAN REMIORZ/THE CANADIAN PRESS


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Maple Leaf invests in plant-based products as tastes change
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Tuesday, April 9, 2019 – Page B1

Maple Leaf Foods Inc. announced plans on Monday to spend US$336-million on factories to produce plant-based protein products as part of a strategy to ensure shoppers buy the company's burgers, whether they are made from beef or tofu.

Mississauga-based Maple Leaf is investing US$310-million into a newly constructed factory in Indiana that will turn soy beans, peas and other protein-rich vegetables into hot dogs, burgers, sausages and deli products.

Maple Leaf also announced plans on Monday to spend US$26-million on upgrades to two existing U.S. facilities. The plants will serve a market segment expanding at a 40-per-cent clip, far outstripping the low-single-digit growth in sales of prepared meats.

"We want to serve a consumer we call the 'flexitarian,' who wants both meat and plant-based protein," Maple Leaf chief executive Michael McCain said.

"These consumers want more protein in their diet, and they want more choices in the proteins they purchase."

Maple Leaf's research shows just 6 per cent of U.S.

households currently eat plant-based protein products, while 98 per cent of consumers buy animalbased meats.

Maple Leaf is targeting the market for refrigerated meals made from plant-based proteins that will complement its existing lines of packaged chicken, pork and beef sold under the Schneiders, Swift and Maple Leaf brands.

The company expects the refrigerated segment will account for approximately 25 per cent of all plant-based protein sales and said sales in this category increased by 40 per cent in 2018. In comparison, U.S. sales of animalbased meat increased by just 2 per cent last year, according to a Nielsen Co. survey commissioned by the Plant Based Food Association (PBFA). "The plant-based foods industry has gone from being a relatively niche market to fully mainstream," said Michele Simon, executive director of the PBFA. "Plant-based meat and dairy alternatives are not just for vegetarians or vegans anymore."

Maple Leaf, which can trace its roots to Kitchener, Ont., sausage makers in the 1880s, currently sells U.S. consumers plant-based products made at facilities in Massachusetts and Washington State, and sold under the brands Lightlife Foods and Field Roast Grain Meat Co. These two brands rank first and second for market share in the refrigerated sector, according to Maple Leaf. Mr.McCain said the two sites will be at full capacity by 2020 and "our supply chain is stressed."

"We're investing in production, in people, in brands and in innovation," Mr. McCain said. Last November, Maple Leaf began construction on a $660-million poultry-processing facility in London, which will eventually replace three older Ontario facilities.

The largest U.S. food producers, including Archer Daniels Midland Co. and Cargill Inc., compete with Maple Leaf in the plantbased protein sector and analysts say the Canadian company is likely to continue acquiring brands to build its product portfolio. Analyst Irene Nattel at RBC Dominion Securities Inc. said in a recent report: "It is clear that Maple Leaf is determined to extend its positioning as the leading supplier of sustainable meats in North America through a combination of greenfield expansion and M&A."

Maple Leaf decided to enter the plant-based protein market five years ago, Mr. McCain said. The company spent US$140-million in 2017 to buy Lightlife from a private equity fund, then committed US$120-million to acquiring Field Roast later the same year. The new factory in Indiana is expected to open late in 2020, hit full production in 2021 and employ 460 people. Maple Leaf obtained US$50-million on government grants and incentives to build the plant, and will fund its construction from cash flow and credit lines.

Maple Leaf forecasts its US$336-million investment in plant-based protein facilities will post 13-per-cent to 16-per-cent returns for shareholders over the long term. The company said the Indiana factory is designed to be expanded if demand warrants.

Maple Leaf said it expects the plant-based division to make 14per-cent to 16-per-cent margins on earnings before interest, taxes, depreciation and amortization (EBITDA), in line with what Maple Leaf generates from traditional meat products.


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Canada's first-mover advantage in the cannabis sector is going up in smoke
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Saturday, April 6, 2019 – Page B8

One short year ago, Canada could proudly claim to be a world leader in cannabis. The federal Liberal government's decision to legalize recreational marijuana sparked a new industry and a string of public market debuts. The 10 largest cannabis companies in the world called this country home.

Today, Canada's first-mover advantage in a multibillion-dollar sector is going up in smoke.

Five of the 10 largest publicly traded cannabis companies are now American. Canopy Growth Corp., the country's largest and most successful player, is effectively controlled by Victor, N.Y.based wine maker Constellation Brands Inc.

Financiers who helped give birth to the boom fear that ill-conceived federal and provincial government policies will doom Canada to second-tier status in cannabis. "The ultimate global winners will be the cannabis companies with the best products, brands and distribution," said Neil Selfe, longtime adviser to Canopy and other cannabis companies and a founding partner at investment bank Infor Financial Group. He said: "On all fronts, the lack of regulatory planning has handicapped Canadian producers."

Anyone who shops for a buzz on the other side of the border can get a first-hand look at the government's most obvious policy misstep. In California, retail chain Dosist welcomes shoppers with pastel colour schemes and shelves stocked with vape pens, offering a clearly curated experience: bliss, passion, calm or arouse. U.S. cannabis outlets take inspiration from Apple stores or Victoria's Secret boutiques.

In Ontario, a prohibition-era urge to make the product look as boring as possible means the government-owned online retailer runs a website featuring indistinguishable photos of marijuana buds, labelled with nothing more than their THC content and price. Communistera Russian bakeries had more charm. And Canadian cannabis producers are largely prevented from expanding south by U.S. federal regulations.

"Currently in Canada, developing recognizable brands is challenging," said a recent report from CIBC World Markets Inc. analysts John Zamparo and Krishna Ruthnum. They said: "Health Canada advertising and labelling restrictions are onerous relative to most legalized states south of the border, and product limitations mean producers are stuck trying to brand more items (i.e. flower) that are considered more commoditized compared to other products."

As the cannabis industry matures, there will be a growing gap between the valuation of companies that simply grow the product and those that innovate, by spinning THC and CBD into medicine, tinctures and wax. Under Canadian laws, many of these products are still illegal, forcing domestic players to focus on lower margin products. We're still hewers of wood and drawers of water, not home builders and Evian bottlers.

Yet the way Bay Street talks about cannabis is changing, to reflect an evolving view on the value-added approach that will distinguish the sector's big winner. When the first public cannabis companies emerged, investment banks valued their shares based on the cost of every gram of "flower" they produced, and the price they could get for the dried plants. By January, CIBC World Markets' analysts shifted their metrics to calculate the price and cost per serving of THC, to reflect the fact that consumers were moving from smoking a joint to tapping products such as oils and edibles.

As a rough guide, a cannabis producer can make in five cents for every milligram of THC they produce from selling flower. Revenue jumps to nine cents a milligram for THC in cannabis oils and 12 cents a milligram of THC in gummies. Margins are expected to be even higher when the industry comes up with cannabis-infused beverages. CIBC analysts said: "The reason that producers and retailers wish to sell products beyond flower is not only much greater ability to develop brands, but to also make better use of cannabis production and extraction."

The initial euphoria around cannabis legalization in Canada dissipated around massive shortages of the product and an uneven retail launch - only nine of 25 licensed stores in Ontario managed to open their doors when legislation permitted on April 1. Cannabis shares are also coming off a high, with valuations on many companies dropping significantly in recent months. Industry consolidation is now a major theme among mid-tier Canadian companies.

Looking ahead, Infor's Mr. Selfe said: "The future global leaders are much more likely to hail from the U.S. and the great Canadian cannabis experiment will be another footnote in a long list of Canadian business firsts that failed to produce sustainable global leaders."


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Knight fight: Goodman fires back in escalating battle for Montreal pharmaceutical company
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Friday, April 5, 2019 – Page B1

Knight Therapeutics Inc. took aim at a dissident shareholder's financial issues and "self-interested" motives on Thursday as the fight for control of the $1-billion Montreal-based drug company grows increasingly bitter.

Knight alleges that shareholder Medison Biotech Ltd. began an activist campaign after the Israeli drug company's profits declined in each of the past four years.

Knight said that Medison, which owns a 7.3-per-cent stake in the Canadian company, put forward its slate of candidates for the board of directors on Monday in an attempt to take over Knight and gain access to its $750-million in cash.

Knight, which made its allegations in a news release, markets drugs that it licenses from large pharmaceutical companies.

It was founded in 2014 by entrepreneur and chief executive Jonathan Goodman, who previously built Paladin Labs Inc. using the same strategy. Mr. Goodman eventually sold that company for US$2.95-billion.

Knight and Medison took ownership stakes in one another in 2015.

As part of that transaction, Medison CEO Meir Jakobsohn joined the Knight board.

Both sides acknowledge the relationship fell apart in 2018, when the two companies tried but failed to negotiate a separation agreement and Medison began an activist campaign.

"Essentially, Mr. Jakobsohn, a 7-per-cent shareholder of Knight, wants to take over the board to remove Jonathan Goodman, our founder and CEO, from the company and to gain access to Knight's cash reserves," Knight said in the release. "Why? Because he needs to prop up Medison, his own private company in Israel, which has made less and less money each year since our 2015 investment."

In response, Mr. Jakobsohn said in an e-mail to The Globe and Mail: "Knight is a failing company, with no strategy and frozen cash. In addition, they are trying to distract shareholders from the issues at hand with ridiculous claims about Medison and its nominees."

Knight shareholders are scheduled to vote on competing slates of directors nominated by the company and Medison at Knight's annual meeting on May 7. In an interview with The Globe, Mr. Goodman said Medison's goal is to either seize control of Knight and its cash or use the activist campaign to negotiate a split between the two companies on the best possible terms.

As part of its proxy campaign for control of Knight, Medison claimed the Canadian company is making poor use of its capital by loaning money to small drug companies. In an interview, Knight president Samira Sakhia said that the lending allows Knight to build relationships with management teams that are unwilling to sell equity in their businesses. She said Knight earned 20-per-cent returns on more than $170million in loans to 15 companies, and used the approach to win the right to sell drugs in markets such as Mexico and Brazil.

Medison also highlighted a decline in Knight's stock price that has seen shares fall from about $10 in 2017 to $7 levels in recent weeks. Mr. Goodman pointed out that Paladin's stock price rose from $1.50 to $152 over 14 years, and the stock price "went sideways for 12 of those years." Mr. Goodman is a passive investor in pharmaceutical company Pharmascience Inc., which is owned by his father and brother, an investment Medison alleged represents a conflict of interest. Mr. Goodman said that while his outside interests are widely known and have never been seen by investors as a conflict of interest in the past, he entered into a blind-trust voting agreement Thursday for his stake in the family business.

Investment banks are siding with Mr. Goodman and his team in this contest. Raymond James Ltd. analyst David Novak said in a recent report: "We believe Jonathan Goodman is unequivocally dedicated to the interests of Knight's shareholders and is unarguably the most disciplined, intelligent and calculated steward of capital in Canadian specialty pharma."

"Knight Therapeutics is still in the early days of amassing and launching its pipeline of novel therapeutics; however, we remain confident in Mr. Goodman's ability to replicate his former success at Paladin Labs," analyst Tania Gonsalves at Cormark Securities Inc. said in a report. She reviewed Medison's plans for Knight and said the proposal lacks clarity "and is riddled with contradictory information."

To assist in its proxy battle, Knight has enlisted law firm Davies Ward Phillips & Vineberg LLP, investment bank RBC Dominion Securities and investor relations firm Kingsdale Advisors.


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Israeli drug maker fights for control of board at Knight Therapeutics
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Monday, April 1, 2019 – Page B1

The largest shareholder in Knight Therapeutics Inc.

plans to launch a proxy fight Monday for control of the $1-billion drug company, following a year-long activist campaign against Canadian pharmaceutical entrepreneur Jonathan Goodman.

Medison Biotech Ltd., a pharmaceutical company based in Israel, owns about 7 per cent of Montreal-based Knight. On Monday, Medison is expected to propose six new directors and the reappointment of its own chief executive to the company's board.

Knight has a seven-person board that includes Medison CEO Meir Jakobsohn. The proxy fight comes less than two weeks after Knight launched a lawsuit against Medison and Mr. Jakobsohn aimed at shutting down their activist campaign, which has been playing out for more than a year.

Mr. Goodman is well known in business circles for both running successful drug firms and for bouncing back from a near-fatal cycling accident in 2011. His family owns a number of drug companies and Mr.

Goodman previously ran Paladin Labs Inc., then sold the firm to Endo Health for US$2.95-billion in 2014.

The same year, Mr. Goodman launched Knight, and the company's strategy is to snap up marketing rights on specialty drugs deemed too small to be worth the trouble for multinational drug makers.

Medison alleges Mr. Goodman is being overly cautious in executing on this strategy, and called for a "new day at Knight" that would see the company license more drugs and return approximately $100million to shareholders through a special dividend.

Knight holds more than $750-million in cash and securities. The company's stock price declined by 25 per cent over the past two years, closing Friday at $7.34 on the Toronto Stock Exchange.

"Rather than seizing opportunities and deploying the company's ample capital to build a valuable and dynamic operating business, Knight has allowed shareholders' cash to stagnate," Mr. Jakobsohn said in a press release obtained in advance by The Globe and Mail.

"Knight meekly sits on the sidelines, dabbling in lending and banking or licensing unremarkable products with modest profit potential."

Knight executives could not be reached for comment on Sunday, outside normal business hours.

In the past, Knight executives have defended their strategy by saying the company's business plan has always included lending money to small pharmaceutical firms. In mid-March, the company said in a press release that "Knight continues to be disappointed by Mr. Jakobsohn's ongoing attempts to extort Knight's board of directors into agreeing to a scheme that is not in the best interest of Knight's shareholders and only advances his own self-serving agenda."

Medison is launching a fight for control of Knight at a time when activist shareholders are starting more fights and winning the majority of proxy contests.

Law firm Fasken Martineau DuMoulin LLP recently published a report that shows in 2018, activists won a full or partial victory in 60 per cent of contests, and 13 campaigns played out, up from 10 proxy fights in each of the two previous years. Last year, Fasken's research also showed "fewer contests initiated by current or former management and more contests initiated by outside activists."

Two other major Canadian companies are currently in proxy fights with activist investors, Hudbay Minerals Inc. and Transalta Corp.

Along with Mr. Jakobsohn, the six directors that Medison is putting forward are all experienced pharmaceutical executives. They are Kevin Cameron, CEO of Ionetix Corp.; Elaine Campbell, the former president and CEO of AstraZeneca Canada; Michael Cloutier, the former general manager of PTC Therapeutics Canada; Christophe Jean, the former EVP of Ipsen Group; and Robert Oliver, former CEO of Otsuka North America Pharmaceutical Co.


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AIG exits Canadian home, auto insurance market amid industry shakeout
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Friday, March 29, 2019 – Page B1

AIG Insurance Co. of Canada is quietly exiting the domestic home and auto insurance business, the latest player to quit the domestic market amid a consolidation trend that's contributing to a rise in insurance rates.

The Toronto-based division of American International Group Inc., one of the world's 20 largest insurers, decided earlier this year to shut down a business that catered to wealthy Canadian clients. Policies will not be renewed as they expire over the next 12 months.

The unit was an offshoot of a successful service that AIG offers ultrahigh net worth customers in the United States and Europe. New Yorkbased AIG published a report on the needs of the wealthiest Americans showing these customers typically own nine homes, 19 automobiles, US$19-million of art and US$1.7-million of jewellery. The annual cost of insuring these possessions runs to US$250,000 or more. In Canada, this would be a small segment of the high net worth market.

"The individual personal insurance line of business represents a small percentage of our portfolio in Canada and based on market conditions, we have decided not to underwrite new policies in this area," AIG Canada spokesperson Lynn Woodburn said. "This decision does not affect the rest of AIG Canada's portfolio."

In Canada, AIG ranks as the country's 13th-largest property and casualty (P&C) insurer, with a 2.2 per cent market share, according to the Insurance Bureau of Canada. The company has 35,000 Canadian clients and 425 employees in the country.

Filings to federal regulators show its Canadian clients paid $54-million for home and car insurance in 2017, the most recent available data.

Property insurance claims from AIG's clients outstripped premiums by $13-million, which would imply the division lost money, while the company took in $8million more in car insurance premiums than it paid out in claims.

AIG is sticking with its core Canadian corporate clients, which paid the company approximately $400-million annually over each of the past three years for products such as liability insurance. Globally, AIG restructured after suffering significant losses during the global financial crisis and is now on secure financial footing: The company posted a US$1.4-billion profit in 2018.

AIG's exit comes amid increased consolidation of the auto and home insurance sector. Intact Financial Corp., the country's largest P&C insurer with 15-percent market share, has acquired a string of rivals over the past decade, including the $2.6-billion acquisition of AXA Canada in 2011.

In 2015, Desjardins Group bought the Canadian P&C arm of State Farm Life Insurance Co. for an estimated $1.3-billion, and is now rebranding the unit.

Privately owned Economical Mutual Insurance Co., the country's eighth-largest P&C company, plans a $1.9-billion initial public offering in large part to access the capital the Waterloo-based company needs to acquire rivals.

Foreign companies are also consolidators in Canada. The country's second-largest P&C insurer is Aviva Canada Inc., which has a British parent, and the company spent $582-million to buy Royal Bank of Canada's P&C insurance operations in 2016. New York-based Travelers Co. Inc. acquired Dominion of Canada General Insurance Co. for $1.1-billion in 2013, vaulting the company into 10th spot in the domestic market.

For the remaining Canadian P&C insurers, consolidation translates into greater scale and pricing power, according to analysts. In a recent report on Intact, CIBC World Markets analyst Paul Holden said, "Industry return on equity has been running well below historical averages (2018 could be around 5%), but rates are firming across many markets (personal auto, personal property and commercial lines)."

Analysts expect the largest insurers to continue snapping up smaller rivals. Mr. Holden said at Intact, "management views the current environment as very favourable for Canada M&A. ... Our impression based on the [fourth quarter] conference call is that Intact expects to do a deal this year."


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Hydro One appoints B.C. utility executive Mark Poweska for top job
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Friday, March 29, 2019 – Page B1

Hydro One Inc. concluded its bruising eight-month search for a new leader on Thursday by announcing B.C. Hydro executive Mark Poweska is the utility's new president and CEO.

Mr. Poweska spent 25 years at B.C. Hydro and is currently executive vice-president of operations for the government-owned company. He replaces Mayo Schmidt, who was forced out of Hydro One last July by Ontario Premier Doug Ford after an election campaign in which the Progressive Conservative Leader railed against compensation at the utility. Hydro One was partly privatized four years ago by Ontario's previous Liberal government, and the province owns 47 per cent of the company.

During last spring's campaign, Mr. Ford repeatedly targeted Mr. Schmidt's $6.2-million compensation package as excessive. Since being elected, the PC government has introduced legislation that caps Hydro One's CEO pay at $1.5-million. At B.C. Hydro, Mr. Poweska made $405,720 last year. In a press release, Mr. Poweska said: "I am committed to Hydro One being a customer-friendly company delivering safe, affordable and reliable power."

The fallout from the Ontario government's meddling in Hydro One's governance included cancellation of a planned $4.4-billion takeover of U.S. utility Avista Corp. The new chief executive is expected to focus on running the province's 153,000-kilometre electrical grid and 8,600 employees, and steer clear of investments outside Ontario.

"Mark's proven record in building a strong safety culture, exceeding customer expectations and improving operational performance will help to ensure that Hydro One is strong now and into the future," said Tom Woods, chair of Hydro One's board.

Mr. Poweska is expected to start in early May.

Colleagues say Mr. Poweska combines a strong engineering background with people skills, such as a track record for a proven ability to work with Indigenous groups. Lesley Cabott, chair of Yukon Energy Corp., brought in Mr. Poweska as an adviser to the territory's electric utility last year and said he helped solve thorny issues, such as where to use limited resources to best build a network that serves cities as well as far-flung rural customers.

"Mark is skilled at anticipating problems and thinking about solutions that work for all our customers, including Indigenous communities and extremely isolated communities," Ms. Cabott said.

She added that Mr. Poweska has a sense of adventure, and would head out before dawn on a "fattire trail bike, wearing a headlamp, to get exercise in the middle of frigid winter."

Hydro One's board of directors has been sparring with the provincial government for months over compensation for the CEO and executive team. The board interviewed more than a dozen CEO candidates when it was offering a compensation package of up to $2.75-million annually.

Many of these executives lost interest in late February, when the Ontario government cut the CEO's paycheck to a maximum of $1.5-million and reduced pay for the rest of the management team.

The contracts of several Hydro One executives expire this spring, and one of Mr. Poweska's first challenges will be retaining senior managers and replacing those who depart.

"We're confident that Mr. Poweska's extensive background in generation, transmission and distribution is the experience Hydro One needs as they continue to move forward as a company," said Greg Rickford, Ontario's Minister of Energy, Northern Development and Mines. In an e-mail, Mr.

Rickford said: "I firmly believe that Hydro One's best days are ahead and the company will be stronger than ever."

Hydro One went public in 2015 by selling shares priced at $20.50 each. The stock subsequently hit highs of $26, but has declined in the past three years, in part due to political uncertainty around the company. Hydro One shares last traded on Thursday at $20.58 on the Toronto Stock Exchange, giving the company a $12.3-billion market capitalization.

With a report from Laura Stone


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HOOPP head's impending exit has two pension plans seeking CEOs
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Thursday, March 28, 2019 – Page B2

Healthcare of Ontario Pension Plan chief executive Jim Keohane announced Wednesday that he is retiring next year, leaving two of Canada's largest pension funds looking for new leaders after OPTrust launched a search for a new head last week.

Mr. Keohane, 63, will leave the HOOPP in March, 2020, after 20 years with the Toronto-based fund, including an eight-year run as CEO that saw the pension plan double assets under management to $79-billion.

HOOPP provides retirement income for 350,000 provincial health-care workers, including nurses and medical technicians.

The plan posted an annual return of 11.19 per cent over the past decade, beating its performance benchmark in every year since 2008.

"I will retire next year knowing that HOOPP is well positioned for the future and has a great team in place to continue on our 59-year history," Mr. Keohane wrote in a note to colleagues.

HOOPP's board of trustees said Wednesday it has launched a search for a successor. The fund's chairman, Adrian Foster, said in a media release that "Jim is well respected around the world for his pension advocacy, investment strategy and leadership."

While CEO of HOOPP, Mr. Keohane also served as a director of Home Capital Group Inc. He resigned from the mortgage lender's board in April, 2017, after the company ran into financial difficulties and was bailed out with a $2-billion line of credit from HOOPP, which carried a 10-percent annual interest rate. The loan was subsequently replaced with a less expensive debt-andequity package from Berkshire Hathaway Inc.

Last week, the $20-billion OPTrust pension plan announced in a three-paragraph news release that after four years at the helm, CEO Hugh O'Reilly had resigned "effective immediately to pursue other interests."

The Toronto-based fund manages the retirement savings of 92,000 Ontario government workers. OPTrust named chief financial officer Doug Michael as interim CEO and said its board had begun looking for a permanent replacement. The next CEO at OPTrust will be the fourth boss in seven years.

HOOPP and OPTrust will have a deep candidate pool to choose from for their next CEO, as Canada's public-service pension plans typically offer executive compensation that is competitive with private-sector wealth managers, such as mutual funds. The pension plans justify these pay packages as the only way to attract talented investment professionals to public-sector plans.

While the two Ontario pension plans don't disclose what they pay individual employees, larger plans such as the Ontario Teachers Pension Plan, OMERS and the CPP Investment Board paid their CEOs between $4-million and $5million last year, and most of the senior executives at the funds took home $3-million or more.

In contrast, many U.S. and European public-sector plans pay their executives civil-servant wages, in the $100,000 to $200,000 range, and often outsource management of their investments.


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A storm brews at Richardson GMP amid three conflicting views for its future
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Wednesday, March 27, 2019 – Page B1

Wealth manager Richardson GMP Ltd. is a dormant volcano these days, with only the occasional puff of smoke, in the form of a few employee departures, to signal the pressure that's building within a firm that manages $27.4-billion.

For the company's 166 financial advisers and their clients, the question is whether Richardson GMP eventually resolves its internal tensions in one explosive event or a prolonged venting of talent. This business is either going to get sold or it's going to see an increasing number of its top performers head out the door. The status quo isn't sustainable.

Founded in 2009, Richardson GMP has three owners with three different takes on the firm's future. Winnipeg's Richardson family owns approximately a third of the company and tends to take a generational approach to building businesses, which comes naturally when your great-grandparents socked away millions from grain trading and your grandparents and parents grew that fortune into billions.

Investment dealer GMP Capital Inc. owns a third of the wealth manager and it usually takes a different view. The firm is run by traders and bankers who evaluate their holdings by quarters, days or minutes, not by generations.

GMP Capital faces serious structural problems. Its core equity sales, trading and research business faces shrinking profit margins. Bank-owned dealers, foreign firms and rival independents compete for every transaction. The cyclical downturn in mining and energy stocks hammered many of the firm's best clients. GMP Capital's stock price has been trending downward for eight years, a source of personal pain for employees, who own 24 per cent of the dealer (the Richardson clan owns another 24 per cent). For strategic reasons, GMP Capital values its stake in Richardson GMP.

The wealth manager gives the investment bank another avenue for distributing securities on behalf of corporate clients. But that strategic value only goes so far. At the right price, the financiers who run GMP Capital would be sellers of their stake in Richardson GMP.

For that matter, at the right price, GMP Capital would be a seller of itself. In recent months, there have been rumours that U.S. players such as Jefferies Financial Group Inc. and Wells Fargo & Co. are sniffing around the Canadian investment dealer.

GMP Capital executives have dismissed all that speculation, to date. As of Tuesday, GMP Capital had a market capitalization of $163-million - a figure that doesn't ascribe much value to the investment-banking business.

The third group of owners at Richardson GMP is the most important. It's the employees, who own approximately one-third of the firm. Most joined because they saw an opportunity to buy equity, help build the business, then cash in by selling all or part of their holdings.

Nearly three years ago, Richardson GMP was put on the auction block, as part of a shareholder agreement meant to put a value on the business and potentially allow all three owners to cash in. A number of bidders came calling, including TorontoDominion Bank and Raymond James Ltd., and the business was expected to fetch up to $600-million. That valuation would have translated into a serious payday for financial advisers.

To the surprise of virtually all concerned, Richardson GMP announced in April, 2017, that no deal would take place; the firm would remain independent.

The reasons were never made entirely clear.

But sources at TD Bank, which made the final round of bidding, have explained there were concerns about blending the two cultures and retaining Richardson GMP employees. For the staff, being close to a big score, only to have the payday postponed or even cancelled, translates into frustrations that have only intensified over time.

When the auction ended in the spring of 2017, Richardson GMP was home to $28-billion of assets and 200 financial advisers. Since then, assets under management dropped $600-million and the head count is down by 15 per cent.

With a once-growing business now shrinking in size and scale, a number of experienced Richardson GMP advisers have been jumping to rivals such as Raymond James and Canaccord Genuity Group Inc.

The Richardson family can afford to take a long-term view on fixing their wealth management.

That's not the case for GMP Capital and the advisers at Richardson GMP. These two owners need to either see the value of their business increasing or they will push hard for an exit. The volcano is beginning to rumble.


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Canadian CEOs look abroad for investment as confidence sags in leadership at home
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Monday, March 25, 2019 – Page B1

Conservative Leader Andrew Scheer and Liberal Finance Minister Bill Morneau trudged through an Ottawa blizzard last month to pitch their respective platforms to an audience of Canadian chief executives. The chill in the room matched the temperature outside, and helps explain why the country's business leaders are increasing their investments outside Canada.

In Mr. Morneau's session, the former CEO challenged members of the Business Council of Canada - a collection of 176 top executives from every sector - to make use of tax cuts enacted in last November's economic update by boosting capital spending. He was greeted with what amounted to passive resistance.

While several executives who were in the room said Mr.

Morneau made a strong speech - council members are asked to keep meetings confidential, so the sources asked not to be named - many CEOs are reluctant to invest in Canada when the country's economic growth prospects are sluggish. Energy executives are particularly reluctant.

When Mr. Scheer took the stage, he bombed. In what was the Conservative Leader's first encounter with many of the CEOs, he served Tim Hortons to a Starbucks crowd. Several audience members said Mr. Scheer focused his message on what his party planned to do for small businesses and entrepreneurs, a subject that's irrelevant to the heads of country's largest companies.

There was little talk of making Canada more competitive on the world stage.

The fact that politicians and corporate types don't see eyeto-eye may be unsurprising, but the lack of business confidence in Liberal and Conservative leaders comes at a time when Canadian CEOs are increasingly looking outside the country for growth opportunities.

The Fraser Institute published a report on Thursday that showed, over the past six years, foreign direct investment by domestic companies increased by 74 per cent, while foreign corporations cut their investments in Canada by 55 per cent.

"When you see less money coming in from foreigners at the same time Canadians are increasingly investing abroad, it's a strong indication that Canada is not a good place to invest," said Steven Globerman, a Fraser Institute senior fellow. He said that these trends extend across industries, with less capital going into manufacturing and utilities, along with an oil and gas sector that hasn't yet recovered from a crude-price crash five years ago.

Takeover activity tells the same story: Domestic companies are spending twice as much on crossborder acquisitions as foreign players are spending on Canadian takeovers. Investment bank Crosbie & Co. Inc. tracks mergers and acquisitions traffic, and found Canadian companies spent $109billion on foreign takeovers in 2018, while international companies dropped $50.4-billion buying domestic businesses.

"Investment by foreign companies and individuals is vital to increasing productivity and improving living standards for Canadian workers, so when the level of investment drops, Canadians suffer," Mr. Globerman said.

Canadian governments of all stripes are looking for corporate support on essential infrastructure such as pipelines. Yet in recent years, the country's leading utilities - TransCanada Corp., Enbridge Inc., Fortis Inc. and Emera Inc. - all made multibillion-dollar U.S. acquisitions. When the history of this era in business is written, it will highlight TransCanada's decision to drop the word Canada from its name after 68 years, and rebrand as TC Energy to reflect its shift to U.S. and Mexican markets.

This country's business leaders continue to take part in the domestic political debate; they're all fascinated by October's federal election. But CEOs see the current crop of federal leaders as uninspiring, and are voting with their wallets by committing an increasing chunk of capital to doing business outside Canada.

Associated Graphic

Canadian Finance Minister Bill Morneau arrives to a news conference in Toronto on March 20 after his speech and discussion about the 2019 federal budget.

COLE BURSTON/THE CANADIAN PRESS


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Onex to buy wealth manager Gluskin Sheff in $445-million deal
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Saturday, March 23, 2019 – Page B1

Private-equity firm Onex Corp. is buying Gluskin Sheff + Associates Inc., one of Canada's last remaining independent wealth managers, in a $445million deal.

The Onex offer of $14.25 a share represents a 28-per-cent premium to Friday's closing price of $11.17, but Gluskin Sheff is agreeing to be sold at less than half its peak value of early 2014.

In Friday's announcement, Onex chairman and chief executive Gerry Schwartz said combining Gluskin Sheff's public securities investing platforms in publicly traded securities with Onex's private equity and private debt platforms will give clients of both firms "greater investment options."

Gluskin Sheff CEO Jeff Moody said the two firms have "a strong cultural fit and a like-minded approach to investing and risk management."

Gluskin Sheff clients will get access to Onex alternative investment strategies, he added.

CIBC Capital Markets analyst Marco Giurleo suggests Gluskin Sheff with a couple of advantages that are owed to its high-end client base. One is that Gluskin Sheff is insulated from many of the regulatory issues around fee disclosure to retail clients, a problem creating headwinds for rival mutual fund companies.

Mr. Giurleo also said Gluskin Sheff's "high-touch service offering" makes it less susceptible to fee pressure than companies in other segments of the wealth management industry.

The firm was founded in 1984 by former real estate analyst Ira Gluskin and onetime architect Gerald Sheff, and went public in 2006. Like many asset managers, it stumbled in the financial crisis, seeing its shares cut in value by more than twothirds.

By April, 2013, the shares recovered to the $18 range, and the company, spurred by Mr. Gluskin and Mr. Sheff, was weighing offers. It ultimately decided not to sell. "The founders, the board and management have concluded that the current platform remains an excellent way to serve clients and enhance shareholder value at this time," they said at the time.

The firm carved out a niche as money manager that catered to Canada's wealthiest families. Mr. Gluskin and Mr. Sheff are noted patrons of the Toronto arts community. The pair spent millions in 1994 on a sponsorship and an epic bash to celebrate the Barnes Exhibition, a collection of French impressionist paintings displayed at the Art Gallery of Ontario.

Gluskin Sheff waged a public battle over retirement benefits owed to its two founders after the pair left the firm in 2010. Mr. Gluskin sought a $75-million payment, while Mr.

Sheff claimed $110-million. After going through arbitration, the firm paid an $13.8-million settlement to the two executives in February, 2018.

Gluskin Sheff has been through three CEOs in as many years. Long-time executive Jeremy Freedman departed in 2016, and was replaced by former CIBC Mellon CEO Tom MacMillan, who in turn gave way a year later to Moody, the current CEO.

In recent years, Gluskin Sheff's assets under management have gone sideways: The firm oversaw $8.7-billion at the end of 2016, compared with $8.2-billion at the end of last year.

With files from Tim Kiladze ONEX CORPORATION (ONEX) CLOSE: $74.92, UP 27¢ GLUSKIN SHEFF + ASSOCIATES (GS) CLOSE: $11.17, DOWN 5¢


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Economical Mutual Insurance moves closer to IPO
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By CLARE O'HARA, ANDREW WILLIS
  
  

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Friday, March 22, 2019 – Page B2

Economical Mutual Insurance Co. is one step closer to a proposed $1.9-billion initial public offering after a first group of policyholders voted 99 per cent in favour of the insurer's demutualization plans.

Rowan Saunders, Economical's chief executive officer, said the confidence shown by insurer's legal owners - clients known as mutual policyholders - at a special meeting on Wednesday supports the company's long-time vision to convert from a mutual into a publicly traded company.

Waterloo, Ont.-based Economical is Canada's ninth-largest property and casualty (P&C) insurer, with a 4-per-cent market share, according to data compiled by the Insurance Bureau of Canada. The P&C industry has been consolidating around its largest players over the past decade, with several foreign-owned insurers selling their Canadian operations to domestic companies, owing in large part to unpredictable profitability in auto insurance.

"We are pleased to see the overwhelming support from the mutual policyholders for a positive vote," Mr. Saunders said in a telephone interview after the vote, which included ballots from 75 per cent of the 878 eligible mutual policyholders.

Next steps for the 148-year old insurer is to get authorization from the Office of the Superintendent of Financial Institutions to hold a final vote for all eligible policyholders, which would include all of Economical's clients, not just the owners.

There has been no date set for when that vote will take place, but Mr. Saunders says he "fully expects it to be a positive outcome," at which point the insurer will apply to the federal Minister of Finance for the final regulatory approval to demutualize.

The process hasn't been a smooth one, taking much longer than expected. The company, founded in 1871, has spent the past nine years on an occasionally dramatic journey toward an initial public offering. Since the process began, policyholders have been in the middle of a heated debate over how Economical's capital should be divided.

The federal Finance Department subsequently ruled that all policyholders who contributed to building an insurer's capital base should receive a share of the company's surplus money.

This meant mutual policyholders who previously were entitled to 100 per cent of the company would have to share the proceeds of the IPO with the rest of Economical's customers, also known as non-mutual policyholders.

After months of negotiations, Economical announced in late January it would split the pot, with mutual policyholders each receiving between $300,000 and $430,000 in shares or cash for their stakes in the company. A second group of approximately 630,000 non-mutual policyholders, who are not legal owners of the firm but did contribute to building its value, will each get $1,500 to $2,300.

Those valuations could change depending when the company decides to plan its IPO, which Mr. Saunders says will not happen in 2019.

"This has taken longer than anybody initially thought ... but we are now measuring the process in quarters, not in years," he adds.


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SNC never claimed jobs were at risk, CEO says
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Neil Bruce says company did not cite economic reasons for settlement of corruption charges, contradicting government officials
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By NICOLAS VAN PRAET, ANDREW WILLIS
  
  

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Thursday, March 21, 2019 – Page A1

SNC-Lavalin Group Inc. says it did not cite job losses as a reason to be granted a settlement in its criminal corruption trial and did not threaten to move its head office out of Canada if prosecutors refused to agree to such a deal, undermining two key assertions from federal officials in the weeks-long controversy.

Chief executive officer Neil Bruce said SNC never made an argument for a settlement based on economic reasons such as job losses, adding that the legislation does not allow such an argument to be made. And Mr. Bruce said SNC did not give federal officials an ultimatum that a failure to grant a settlement would result in the company moving its headquarters. "We've never threatened anybody with that.

Never, ever," Mr. Bruce told The Globe and Mail on Wednesday morning in Toronto.

He said the possibility of such a move might have been discussed in terms of a potential negative outcome in the criminal case. "We need to make alternative arrangements," he said, adding that if the company were to be banned from federal domestic contracts, engineering talent would be lost to U.S. and European rivals.

The Globe reported on Feb. 7 that officials in the Prime Minister's Office put pressure on former attorney-general Jody Wilson-Raybould to reach a negotiated settlement with SNC-Lavalin on bribery and fraud charges that the company faces.

The resulting political fallout has resulted in four departures: Ms. Wilson-Raybould has resigned from cabinet; Prime Minister Justin Trudeau's principal secretary Gerald Butts has stepped down; former Treasury Board president Jane Philpott left cabinet, and Privy Council Clerk Michael Wernick announced his retirement.

SNC's statements contrast with those from government officials, including testimony from Mr. Wernick and Mr. Butts. In his testimony, Mr. Wernick said government officials believed there was a risk of SNC moving its headquarters. Both he and Mr. Butts repeatedly cited the possibility of job losses as a key part of the discussion over whether to proceed with the prosecution of SNC.

When asked during the justice committee hearings whether there was any evidence that jobs were at risk if SNC were not granted a negotiated settlement, Mr.

Butts said he was briefed on the subject "multiple times" but could not recall "anything specific."

The Montreal-based builder, once venerated for its global leadership and pristine balance sheet, is bracing for a trial on bribery and fraud charges that could last several years after it failed to win a settlement from federal prosecutors. A conviction could result in a 10-year ban on federal contracts and hurt its international business as well.

In a remarkably candid interview in which he was visibly angry about the way things have transpired, Mr. Bruce says many Canadians appear to have given up on the company and are vastly underestimating how crucial it is to the functioning of key parts of the country's infrastructure.

"Nobody appears to give a crap about whether we fail or not in Canada," Mr.Bruce said.

"We want to put this behind us. I mean we've been under this cloud for seven years. No other place in the world would you be under this cloud for seven years. ... When is this going to end?" Mr. Bruce maintained that SNC is a fully reformed company in terms of its business ethics, that those responsible for past wrongdoing are long gone, that the firm has done everything by the letter in terms of its communications with political officials in Ottawa.

He said Canadian authorities have failed to bring the former SNC executives at the centre of the bribery and fraud allegations to proper justice, suggesting much of the blame is now falling unjustly on the company as a result.

SNC-Lavalin still has no idea why it was not given the chance to strike a settlement, Mr. Bruce said. He said Canadians are failing to understand the consequences that a ban on the company in Canada could bring.

"All of our positions, all of the information that we've shared, is all about public interest and it's about protecting the innocents," Mr. Bruce said. "You really have an obligation to absolutely pursue the people who are responsible for this. And at the moment, I just feel like it's upside down. I don't see anybody being held to account apart from the company. And the company can't go to jail. You could destroy the company. But I'm not quite sure what the hell that's all about."

Mr. Bruce emphasized on SNC-Lavalin's importance to the national economy, not only in terms of the roughly 9,000 people it employs in Canada but also in its unique capabilities. Quebec has been the company's biggest defender, saying it is a strategic company that needs to be protected.

Mr. Bruce, however, said the company has an even greater weight for Ontario, noting that SNC has unmatched nuclear assets and technology and is working on several key projects for the province's power producers.

"The biggest impact of SNC-Lavalin not doing business in Canada is Ontario, not Quebec. It's Ontario," Mr. Bruce said. "Because I'm not sure who's going to do [Ontario Power Generation]. I'm not sure who's going to do Bruce Power. I'm not sure who's going to do Pickering. I'm not sure who's going to do Chalk River. Apart from the Americans. They're the only ones who have the capability to step in. And if Canada thinks that's a neat solution, then hey, let's settle for the bronze again."

Mr. Bruce, a Scotsman hired by SNC-Lavalin in 2013 from Britain's AMEC PLC, is trying to write a new chapter for SNC that involves expand the company to $15billion in annual sales and adjusted profit of $5 a share by 2020. But he's been stymied in that effort by legal trouble in Canada that won't go away and unexpected problems disclosed in January, notably a payment dispute in a contract for Chilean copper producer Codelco involving the construction of two sulfuric-acid plants. The problem boils down to mandating SNC subcontractors to do work that Codelco hadn't approved.

SNC management has also said it is unsure about the company's ability to win new work in Saudi Arabia amid strained political relations between Canada and the Middle East kingdom. Although current projects are unaffected, Saudi clients have made it clear that they might exclude SNC from bidding on future work while the diplomatic rift continues, Mr. Bruce has said. The company acquired the bulk of its oil and gas capability in August, 2014, through the purchase of Kentz, just before global crude prices tanked.

SNC slashed its quarterly dividend by more than half on Feb. 22 to conserve cash in the wake of the problems. It also won debt covenant relief on certain loans from lenders. S&P Global ratings cut SNC-Lavalin's credit rating to the cusp of junk last month, saying it expects SNC "will face headwinds over the next couple of years that contribute to slower growth as well as earnings and cash-flow volatility." Trouble has mounted quickly and taken the market by surprise, leading to calls by some investors for the company to take deeper actions, such as selling assets. Confidence in management has also been rattled, to the point where some shareholders, such as Montreal-based investment firm Palos, have exited their long-held positions in the company.

"We believe SNC-Lavalin will struggle to win projects and attract new fundamental investors for as long as its legal troubles persist," Raymond James analyst Frederic Bastien said in a Feb. 25 research note, adding that politicization of the company's situation dims the chances for a legal settlement. "The scandal lends itself well to campaign-time propaganda" heading into federal election this fall, he said.

Mr. Bruce took issue with the narrative that his 9,000 Canadian workers would find jobs elsewhere if SNC was banned. He said while that may be true, the talent and expertise will shift to U.S. or European rivals, companies that have benefited from deferred prosecution agreements (DPA) similar to the one SNC is seeking.

"Yes, the 9,000 people will get a job. I have no doubt whatsoever about that," Mr.Bruce said. "But they'll be working probably for a U.S.

company. And there's a 75per-cent chance that the U.S.

company that they're working for has done a DPA. How ironic is that?" SNC's own research shows that at least three quarters of its competitors in the engineering and construction space have gone through some form of DPA or settlement in their home country, Mr. Bruce said.

SNC stock fell more than 1 per cent in Toronto on Wednesday to close at $34.24.

It is trading at levels not seen in a decade.

The process already under way to sell a piece of its stake in the Highway 407 Toronto-area toll road continues to progress, Mr. Bruce said. Selling the stake would resolve the company's balance-sheet stress based on analysts' expectations that it would fetch $2-billion after tax, according to National Bank analyst Maxim Sytchev.

The past continues to haunt the company. The RCMP in 2015 laid one charge of bribery against the company under the Corruption of Foreign Public Officials Act and one charge of fraud under the Criminal Code. It is alleged that the engineering firm paid millions of dollars in bribes to individuals in the former Libya government of the late dictator Moammar Gadhafi between 2001 and 2011 to secure government contracts.

To protect against the potential damage caused by a multiyear court fight, SNC revived a team of directors and external advisers in October, 2018, to analyze the options for reshaping operations. Mr. Bruce declined to give much in the way of additional detail about that effort on Wednesday, but said "all options are on the table," including breaking the company up and shifting more business outside Canada.

Under current federal procurement rules, SNC-Lavalin would be banned for up to 10 years if its trial ends in a conviction.

Observers say it could likely weather that ban as a company. But what's not known is how much additional business it would lose from other clients in Canada and elsewhere, many of whom might have policies preventing them from doing business with convicted suppliers.

SNC has asked for a DPA that would allow it to settle the charges without going to trial to spare what it calls its "innocent" stakeholders. But it says it is now focused on preparing for a trial, in which it intends to vigorously defend itself. The company will not invoke arguments that it took too long for its case to come to trial, Mr. Bruce said.

SNC-Lavalin has symbolic importance in Quebec, as one of the largest truly global companies to have its headquarters in the province. And there are thousands of jobs involved. In a Sept. 17 meeting between Mr. Trudeau and Ms. Wilson-Raybould, she said he raised both issues. "The Prime Minister asks me to help out - to find a solution here for SNC - citing that if there was no DPA, there would be many jobs lost and that SNC will move from Montreal," she testified.

Mr. Bruce apologized for the company's darker past in an open letter to Canadians published last fall. "The truth is, the events prior to 2012 that led to the federal charges should never have taken place," he said.

The SNC CEO has said he was not aware of any political pressure on Ms. WilsonRaybould. And he has declined to comment on how her successor, Montreal-area MP David Lametti, would handle the file.

Fixed-income investors have shown more optimism than retail investors in SNC's ability to weather the storm. The company's five-year corporate bond, due in 2023, has been relatively stable throughout the controversy, suggesting the company's longer-term investors are confident that their dollars are safe. After falling as much as 3.1 per cent below par in mid-February, the bond has since recovered and now trades at 1.82 per cent below par.

Much of that fixed-income investor faith is tied to SNC's backlog. The company's order book of work won but not yet completed stood at $14.9-billion at the end of December, proving it can still bag contracts in different parts of the world. Recent wins include a three-year deal for engineering work on Chevron's oil operations in Australia, announced on March 12, and a preliminary agreement with the City of Ottawa for a $660-million extension for its Trillium light-rail transit line, announced on March 7.

"There's a lot of bids out there and still more to come," AltaCorp Capital analyst Chris Murray said. "It does take time to get that [infrastructure funding] in. But we have started to see a number of awards come through and they've won a fair share of those."

With reports from Les Perreaux and David Berman

Associated Graphic

Although Quebec has been SNC-Lavalin's biggest defender, the company's chief executive Neil Bruce, seen at SNC's Toronto offices on Wednesday, says Ontario will be most affected if the firm is banned from government contracts.

FRED LUM/THE GLOBE AND MAIL


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SNC's Neil Bruce says 'we need to move on' from corruption controversy as he rebuilds business
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Thursday, March 21, 2019 – Page B1

A big part of Neil Bruce's job lately has been sitting down with clients of SNC-Lavalin Group Inc. to find out why his company lost out on multibillion-dollar engineering contracts.

The clients - oil companies, utilities, miners and others - often explain that the bribery and fraud charges faced by SNC, and the related political firestorm in Ottawa, make doing business with the Montreal firm impossible. Typically, those clients are choosing to sign with a U.S. or European rival instead.

More often than not, Mr.Bruce claims, that foreign competitor has had a few legal problems of its own. Corruption is not unheard of in the construction business. Some countries choose to deal with bad corporate behaviour through the use of formal settlements known as deferredprosecution agreements (DPA), in which a company agrees to fines and other sanctions in return for avoiding criminal prosecution. Canada has DPA legislation now but Mr. Bruce knows that his company isn't going to be allowed to take advantage of it.

So off to court goes SNC - with the prospect that it will continue to lose contracts for years while a dark cloud hangs over the company.

Which is why, after weeks of seeing his company's mistakes in Libya and elsewhere repeated in one news story after another, Mr. Bruce came out to speak, in frustration and in anger.

In his first major interview since The Globe and Mail revealed the pressure faced by thenattorney-general Jody Wilson-Raybould to settle SNC's legal case out of court - kicking off a chain of events that continues to rock Prime Minister Justin Trudeau's government - Mr.Bruce made a couple of things clear. First, his company still strives to be a global champion, based in Quebec. Second, he's adamant that SNC is now playing by the rules on all fronts, including its lobbying of government officials.

From where Mr. Bruce sits, this controversy should be called the Wilson-Raybould affair, rather than being branded with SNC's name. It was Mr. Trudeau's decision to replace her as attorney-general, and her later testimony about how the SNC legal matter was being handled behind-the-scenes, that sparked the political car-wreck for his government.

Mr. Bruce said he is baffled by those who seem bent on bringing down the company. He has met with Andrew Scheer on three occasions.

Privately, the Conservative Leader is supportive; publicly, he continues to use SNC's name to bash the Liberals. Mr. Bruce said that outside the country, long-time SNC clients "ask, what the hell is going on in Canada?" "I've been all over the world trying to reassure customers and employees that what's going on in Canada really fundamentally doesn't have anything to do with us," Mr. Bruce said.

"The main thing it's doing is trashing our reputation, and our competitors are loving it."

Since becoming CEO in 2015, Mr. Bruce has tried to clean house at SNC.

He installed a new management team and expanded the business through foreign acquisitions, with employment rising from 35,000 to more than 50,000. The Scotland-born marine engineer apologized, repeatedly, for sins that he says were committed under previous management. He also became co-chairman of the World Economic Forum's anti-corruption task force.

"We should be holding our employees and our company to the highest possible standard," Mr. Bruce said. "There were a number of things in the past that weren't done to the highest standards. But we've apologized for that. I'm sorry about that. But we need to move on."

In the public relations fight, Mr. Bruce is trying to position SNC as the only Canadianbased player at the top end of the engineering and construction industry that is able to deliver start-to-finish work on complex projects such as nuclear power plants, refineries and pipelines. Contrary to what has previously been reported, he said, SNC has never threatened to move its head office out of Montreal. But he added: "We are a proud Canadian and proud Quebec company, and it would be a tragedy if the company, in 10 or 20 or 30 years' time, was not based here."

SNC is financially sound, with a $14-billion backlog of projects and assets such as a stake in Ontario's 407 toll highway that could be sold to raise capital. However, the company estimates it has lost at least $5-billion of potential contracts due to fallout from the corruption allegations.

Mr. Bruce said as both CEO and a relative newcomer to Canada, he wants more for his company and his country.

"I struggle a little with the [Canadian] psyche. It's, 'Let's compete in the international arena and we're happy with the bronze medal,' " Mr. Bruce said. "I want us, as a Canadian global champion, to win the gold. I want us to be the best." It might take a three-year court battle, and a bit of luck, for SNC to have sight of that goal.


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Timbercreek launches second Irish property fund amid Brexit chaos
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Monday, March 18, 2019 – Page B1

Canadian real estate fund Timbercreek Investment Management Inc. is launching its second Irish property fund to take advantage of the Brexit chaos, which is driving companies out of the United Kingdom and into cities such as Dublin.

Toronto-based Timbercreek has invested $9-billion in global property markets, by both directly owning buildings and making real estate loans.

The fund began lending on Irish projects from an office in London in 2012.

Timbercreek chief executive Blair Tamblyn said he quickly realized that relatively low competition from rival lenders and strong demand for commercial real estate financing meant "Ireland offered far better opportunities than markets such as London and other major European centres."

In 2017, Timbercreek opened an office in Dublin with a threeperson team and raised a 200million ($300-million) dedicated Irish real estate debt fund.

By the end of last year, the fund had made 19 mortgage loans totalling 118-million on office buildings, retail and residential properties, and the portfolio earned a 7.9-per-cent annual return.

It recently launched a second Irish real estate finance fund for institutional clients, which include pension plans, insurers and wealthy individuals.

The new fund still needs to be approved by Canadian regulators, and Mr. Tamblyn could not comment on specifics, but it is expected to be larger than the employeeowned firm's first Ireland fund.

Timbercreek's Irish operations are led by Paul Roddy, who previously worked at the Irish Bank Resolution Corp., a governmentcontrolled entity created in 2009 to manage two failed banks. In an interview, Mr. Roddy said the threat of Brexit has already seen companies in sectors such as banking, insurance, pharmaceuticals and technology expand their operations in Dublin, often by moving employees from offices in London, and more immigration is expected.

"Ireland will represent a unique opportunity for foreign companies to maintain access to both the European and U.K. markets, he said.

Ireland was hit hard by the global financial crisis of 2008, and Mr. Roddy said many commercial properties have been poorly cared for since then and need significant renovations to meet the needs of global companies moving to the country. Timbercreek expects to finance upgrades to these office and retail properties.

In addition to rising demand for office space, he said Dublin's residential real estate market is being squeezed by incoming workers who need a place to live, and Timbercreek expects to lend to condominium developers.

Ireland's real estate market features domestic and international lenders willing to provide large mortgages on major buildings and developments, but very few mid-market players willing to lend on smaller properties, according to Mr. Roddy. So Timbercreek's focus is on making shortterm mortgage loans on midsized commercial properties. For example, the firm's first Irish fund made a $34-million loan on a student residence that will be repaid in 25 months, as well as a $16.3-million, 24-month loan on a retirement home.

Timbercreek was founded in 1999 and initially invested directly in real estate. The company now owns 200 apartment buildings with 23,000 units. The fund began lending on properties in 2007 and expanded that expertise in 2016 by hiring veterans of General Electric Co.'s real estate division, including Timbercreek global head of debt Bradley Trotter, a former president of GE Capital's North American real estate unit.

Timbercreek is the latest in a series of Canadian financial companies to invest in Ireland during troubled times. Prem Watsa's Fairfax Financial Holdings Ltd.

was part of a consortium that recapitalized the Bank of Ireland in 2011 and exited the holding after about four years, pocketing a gain of more than 500-million. Desmarais family-controlled GreatWest Lifeco Inc. acquired Irish Life Group Ltd. from the country's government in 2013 for $1.75-billion, and Irish Life subsequently made a series of small acquisitions in the country.

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Timbercreek Investment Management is launching its second Irish property fund to take advantage of the Brexit chaos, which is driving companies out of the United Kingdom.

PETER MUHLY/AFP/GETTY IMAGES


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Callidus interim CEO resigns weeks before year-end results
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By ANDREW WILLIS, JEFFREY JONES
  
  

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Tuesday, March 12, 2019 – Page B1

The interim chief executive officer of alternative lender Callidus Capital Corp. has resigned without explanation, less than five months after signing on and weeks before the company is due to report year-end results.

Callidus, the publicly traded lender that is controlled by Newton Glassman's Catalyst Capital Group Inc., said in a two-sentence statement that Patrick Dalton had resigned from his consulting role and as interim CEO, and that the rest of the management team would assume his duties. The company gave no reasons. Mr.

Dalton had replaced Mr. Glassman, who took a medical leave last year.

Mr. Dalton's departure comes at a pressing time for Callidus, which is a lender to distressed companies. In December, its second-largest shareholder floated a proposal to buy out minority shareholders at $2 a share, a fraction of the estimated valuation that Mr. Glassman talked about when he began to discuss a privatization of the company in 2016. Callidus shares, which were sold for $14 in the initial public offering in 2014, closed Monday at $1.71.

The low valuation affects not only the company's public shareholders but also investors in Catalyst's private funds, which hold a majority of Callidus shares.

Callidus has reported a string of losses as its borrowers - companies in diverse industries such as energy, garbage-bin manufacturing and casino-game development - have struggled.

Callidus has formally taken control of a number of these companies, which means it has to consolidate their financial results on its own books. Partly as a result, Callidus has lost money for eight consecutive quarters, losing a total of $345-million in that time.

Mr. Dalton was appointed in late October after Mr. Glassman decided to step back from his duties at Callidus to have back surgery, then a lengthy recovery. Mr. Glassman said at the time that he would remain Callidus's chairman and was keeping his leadership positions at Catalyst, a private-equity firm that controls about 72 per cent of Callidus and guarantees some of its debt.

Dan Gagnier, a spokesman for Callidus and Mr. Glassman, said he could not provide any more details behind the departure or a timeline for Mr.

Glassman to return as CEO. Mr. Dalton also did not respond to inquiries from The Globe.

Mr. Dalton has been described as an expert in alternative credit who spent 25 years with U.S. private credit funds and investment bank Goldman Sachs Group Inc. When he arrived at Callidus, the company owed $41-million to creditors under a senior secured loan. The loan was scheduled to be paid back in 2017, but was extended twice, and is due at the end of March.

A source familiar with Callidus's finances said the loan came from insurer Sun Life Financial Inc. A spokeswoman for Sun Life said the insurer had not insisted on Mr. Dalton being hired.

"While the terms of our loans vary with each client, in this instance, we were not involved in the hiring process," Sun Life's Connie Soave said in an e-mail.

In January, Callidus announced that a company it controls, C&C Resources Inc., sold a division for $100-million in cash. C&C is a forest products company.

In a news release, the company said: "Callidus will use approximately $55million of the cash received from the sale to repay indebtedness." Mr. Gagnier said the debt and Mr. Dalton's departure were not related.

In December, Callidus received a proposal from Bahamas-based Braslyn Ltd., a firm controlled by British billionaire Joe Lewis, to take the minority public shareholding private for $2 a share. Braslyn, which has 14.5 per cent of Callidus's shares, has yet to make a formal offer. Still, the amount is well below the target price of $18 to $22 a share, based on a National Bank Financial valuation, that Mr. Glassman had set for a privatization deal more than two years ago.

Callidus is expected to report its fourth-quarter and year-end financials by early April.


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Catalyst tries again with Gateway IPO amid pressure to cash in some of funds' holdings
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Monday, March 11, 2019 – Page B1

President Donald Trump, a former casino owner, may have done Gateway Casinos and Entertainment Ltd. a favour by shutting down the U.S. federal government in late December.

Burnaby, B.C.-based Gateway announced plans to go public on the New York Stock Exchange in late November, initially targeting the sale of US$100-million in shares. The casino company, owned by financier Newton Glassman's private equity firm, Catalyst Capital Group Inc., quickly hit two roadblocks. First, equity markets went into a tailspin in December.

Then, Mr. Trump's 35-day shutdown of the government meant regulators at the Securities and Exchange Commission stopped processing paperwork for initial public offerings.

By the time the U.S. President ended the standoff in late January, sentiment had shifted and markets were rallying. Shares in publicly traded Great Canadian Gaming Corp., a company that competes with Gateway in B.C. and Ontario, jumped nearly 15 per cent in the first two months of the year, though they sold off last week on a disappointing earnings report.

Investment bankers working on the deal said Gateway is now preparing updated financial information and expects to resume marketing the IPO to investors in the coming weeks.

The investment bankers were granted anonymity because they were not authorized to speak publicly about the matter prior to the offering. A spokesman for Catalyst declined to comment on Gateway, citing U.S. regulations that forbid discussions around IPOs until they are approved.

If Catalyst can get Gateway listed on the big board, it would mark the first time in a while that Mr. Glassman has delivered on the promise of a big payday from cashing in one of his company's holdings.

Catalyst manages approximately $4.6-billion, according to Gateway in the IPO documents, on behalf of institutional investors such as pension plans, endowments and family offices, and has extended deadlines for returning capital on a number of its funds.

Last year, investors in Catalyst were told by Mr. Glassman to expect impressive returns on several impending deals involving companies it controls, including Gateway, publicly traded lender Callidus Capital Inc., Therapure Biopharma Inc., Advantage Rent A Car and Sonar Entertainment Inc.

He told investors in a letter sent last summer to expect developments on those fronts, but so far, nothing has been made public other than the Gateway IPO filing.

Gateway initially filed to go public in 2012, then pulled the offering. The latest stock sale is led by Morgan Stanley & Co.

LLC, Credit Suisse Securities (USA) LLC and Goldman Sachs & Co. LLC. Catalyst also announced plans to list a division of Therapure on the Nasdaq exchange, but has yet to follow through on the transaction.

In the paperwork for the Gateway IPO, Catalyst highlighted recent expansion that saw the casino company win mandates from the government-owned Ontario Lottery and Gaming Corp. to operate three regional "bundles" of casinos under the province's partial privatization. Gateway runs 26 casino properties and posted an operating profit of $27-million on revenue of $424-million through the nine months ended Sept. 30, the most recent publicly available financial results.

If the IPO happens, Catalyst's plan is to continue to own a significant stake in Gateway. Several investors who met with Gateway executives during IPO marketing meetings in December said they expected Catalyst to continue selling Gateway shares in the months after the stock is listed. These investors, who were given anonymity because they signed confidentiality agreements, said they would likely not buy into the IPO and would instead wait to see how the stock traded before making an investment decision. Gateway executives pitched the potential growth of gambling revenues from Ontario properties that are being built or renovated as part of IPO sales pitch, they said.

Along with the long-delayed Gateway offering, Mr. Glassman had also floated plans to buy out public investors in Catalyst-controlled distressed lender Callidus, which went public in 2014 at $14 a share. In December, Callidus's second-largest shareholder, Bahamas-based Braslyn Ltd., proposed to buy out the minority shares for $2 each, well below Catalyst's previous estimated target of $18 to $22 a share.

But Braslyn, an investment firm owned by British billionaire Joe Lewis, has said nothing publicly since. Callidus shares closed Friday at $1.68 on the Toronto Stock Exchange.

Associated Graphic

Burnaby-based Gateway Casinos and Entertainment expects to resume marketing of its initial public offering to investors in the coming weeks, according to investment bankers working on the deal.

RAFAL GERSZAK/THE GLOBE AND MAIL


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In the face of skepticism, Enbridge's CEO continues his charm offensive
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By ANDREW WILLIS
  
  

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Tuesday, March 5, 2019 – Page B4

Like a politician out knocking on doors in search of votes, Enbridge Inc. CEO Al Monaco is working the rubberchicken circuit in search of public support for new pipelines.

And like any aspiring candidate, the veteran utility executive is getting doors slammed in his face as he tries to find new ways to move Alberta oil to global markets.

Mr. Monaco took the stage at a Canadian Club lunch two weeks ago to pitch for the elusive social licence Enbridge needs to complete projects such as the $9-billion Line 3 pipeline that runs from central Alberta to Wisconsin. It was a thoughtful presentation, made alongside Royal Bank of Canada CEO David McKay, that neatly tied developing Canada's energy resources to the nation's future prosperity. The pair made it clear that Canada can exploit its oil and natural gas reserves, while fighting climate change and moving forward on reconciliation with indigenous groups.

But Mr. Monaco's charm offensive isn't swaying regulators.

Enbridge announced late Friday that oil won't flow through Line 3 until late in 2020, at least a year later than previously anticipated. The Calgary-based company is waiting on approvals from regulators in Minnesota and U.S.

federal permits, which would come after the state approvals.

RBC Capital Markets analyst Michael Tran summed up the situation by saying: "The delay to the Line 3 replacement is yet another blow to a beleaguered Canadian oil industry that simply cannot catch a break."

Regulatory woes knocked the stuffing out of energy stocks of all stripes on Monday. Shares in Enbridge, one of North America's largest utilities, fell 5.8 per cent.

The prospect of a widening gap between world prices and what Canada's largest producers get for their oil hit the price of shares in Canadian Natural Resources Ltd., down 4.5 per cent, and Cenovus Energy Inc., down by 5.7 per cent.

To CEOs such as Mr. Monaco and Mr. McKay, the case for building new pipelines is a nobrainer. While knives and forks clattered, the two executives said the best way to fight climate change is for Canada to export oil and relatively clean natural gas, allowing countries such as the United States, India and China to increase energy consumption while retiring dirty coalburning power stations. Mr. Monaco showed a sense of humor by calling the rising global demand for fossil fuels an "inconvenient truth," riffing off the title of Al Gore's award-winning climate change documentary.

The two CEOs went on to argue that Canada can use the capital raised from selling energy to fund its transformation to a green economy, a subtle argument that Prime Minister Justin Trudeau has also rolled out, with limited success. Mr. Monaco and Mr. McKay said exploiting oil and gas reserves in an efficient and consistent manner would boost Canada's GDP by 1.1 per cent, the equivalent of developing a new auto sector, and increase government tax revenues by $200-billion over the next decade.

Alberta's NDP government, which faces an election this spring, reacted to the Line 3 delay by pointing out that it has a strategy to deal with the problem that includes temporary production cuts and plans to lease 4,400 rail cars to help transport crude to market.

Again, Mr. Monaco took a diplomatic approach when discussing rail shipments as a competitor to his company's pipelines.

At last month's lunch, RBC's Mr.McKay pointed out the recent rail accident in B.C.'s Kicking Horse Pass, which claimed three lives, would have been far worse if the train were carrying crude.

Mr. Monaco responded by saying while everyone in the energy transportation industry tries to refrain from highlighting each other's mishaps, it's clear that pipelines are by far the safest way to transport oil.

As plates were being cleared at the Canadian Club lunch, Mr.Monaco acknowledged that so far he and his oil patch peers have failed to make their case to the public. He said: "Let me share my frustration as a Canadian. It feels like we are not proud of our energy industry. It feels like we just tolerate it."

Look for more CEO speeches, and continued marketing campaigns for pipelines from backers such as the Alberta government, as Enbridge and its peers try to win support for their multibillion-dollar projects from regulators and a skeptical public.


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Will Hydro One be Ford's version of gas plant mess?
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Ontario government is throwing away money by meddling in publicly traded utility to score partisan political points
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By ANDREW WILLIS
  
  

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Monday, March 4, 2019 – Page B2

Former Ontario premier Dalton McGuinty's reputation was tarnished by his government's mishandling of the province's electricity market. His politically motivated decision to cancel development of two gasfired power plants turned into a $1.1-billion boondoggle.

You can draw a straight line from that debacle to Mr. McGuinty's exit from politics to the political problems of Premier Doug Ford.

Mr. Ford's government is throwing away money by meddling in publicly traded Hydro One Ltd. to score political points and fuel fundraising campaigns.

Bay Street is already questioning his judgement. That's bad, but no real danger to a populist premier. Mr. Ford works hard at cultivating an outsider image.

However, Mr. Ford and the Ontario Progressive Conservatives risk doing gas-plant-scale damage to their reputations if the financial damage from their political interference in Hydro One continues to rise, while at the same time the government makes zero progress on an election promise to cut power prices by 12 per cent.

Mr. McGuinity's credibility crumbled because he initially announced the cost of gas plant cancellations would be relatively modest - $230-million - and the numbers kept getting bigger.

Mr. Ford's credibility problem also starts with an insignificant sum of money. He rode to office last spring in part by promising to lower power prices by getting rid of Hydro One's $6-million man, former CEO Mayo Schmidt, who was paid $6.2-million the previous year.

Once in office, the PC's delivered on the pledge by pushing out Mr. Schmidt and the board.

The government then continued to meddle with Hydro One's compensation plans. The PC party featured Mr. Ford's campaign against Hydro One pay packages last month in fundraising emails to members.

The price tag on Mr. Ford's bull-in-a-china-shop approach is spelled out in Hydro One's latest financial results, released last month. U.S. regulators blocked the planned US$4.4-billion takeover of U.S. utility Avista over concerns about political interference in Ontario.

As a result, Hydro One paid a $138-million termination fee to Avista and took a $46-million hit on a variety of financing charges that stem from the deal. It also paid $7-million in interest during the quarter on debentures the company sold to pay for the takeover, then redeemed. Add it up, and Hydro One dropped $191-million to allow Mr. Ford to keep his promise on a $6-million CEO.

Beyond all that cash going down the drain, Hydro One stock now trades at a discount to other utilities due to political interference, according to every analyst following the company. Call it the Ford factor.

UBS Group AG, for example, estimates there is a 12-per-cent gap between Hydro One's share price and that of comparable utilities. Hydro One's market capitalization is $12-billion, so the discount represents $1.4-billion in lost valuation for shareholders. Or $300-million more than Mr. McGuinty spent on gas plants.

Who's the biggest loser because of that valuation gap? The Ontario government - because it owns 47 per cent of Hydro One.

"We view the cap the Ontario government is forcing on Hydro One's executive compensation negatively," Robert Hope, an analyst in Bank of Nova Scotia's capital markets unit, said in a report that came out on the heels of the government's announcement of a pay scheme that limits the CEO's pay package to $1.5million. "We remain cautious until there is greater clarity on Hydro One's pending rate decisions and how Premier Ford intends to reduce Ontario electricity pricing by 12 per cent."

The Ford factor also shows up in credit rating agency reviews on Hydro One, which has $10-billion in long-term debt. In December, Standard & Poor's said it could downgrade the company "if the Ontario government intervenes further in [Hydro One's] business or operating decisions, resulting in additional governance deficiencies that we consider severe."

Since that warning, the Ford government has fought public battles with the utility's board over executive compensation. If S&P does cut Hydro One's single-A rating, the company's borrowing costs will jump.

What baffles Bay Street, but hasn't yet registered with the general public, are continuing government decisions that hobble Hydro One. Last month, the Tories stepped into the contest for the right to build and operate a 450-kilometre network out of Thunder Bay, known as the EastWest Tie. In bidding for the project, Hydro One faced off against a consortium controlled by Florida-based NextEra Energy. The provincial regulator, the Ontario Energy Board, was expected to choose a winner this month.

Despite Hydro One's bid being $100-million below its rival's offer, the PCs stepped in ahead of a decision from the regulator and awarded the project to the NextEra consortium. Energy Minister Greg Rickford cited the winning bidder's strong ties to First Nations groups in announcing the decision.

In a report, Industrial Alliance analyst Jeremy Rosenfield said the decision was a serious setback, "effectively removing one potential longer-term investment for Hydro One, and further illustrating the political/ regulatory risk in Hydro One at this time."

Voter anger at Ontario's last Liberal government carried Mr.Ford into office, outrage driven in large part by the previous premiers' perceived mistakes on energy policy. By some measures, the cost of this government's interference in Hydro One already exceeds what the Liberals spent on gas plants. And there's no sign yet of the promised 12-percent reduction in electricity rates.

Like his predecessors, Mr. Ford is finding out there are no easy fixes to Ontario's energy market and little tolerance for politicians who underplay the cost of keeping the lights on.


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Justice, jobs and SNC-Lavalin
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The Trudeau government may want to protect the company from prosecution to preserve jobs. But SNC is already a much smaller employer than it used to be
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By NICOLAS VAN PRAET, ANDREW WILLIS
  
  

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Saturday, March 2, 2019 – Page B6

When Canada went to war in Afghanistan in 2001, the federal government turned to SNCLavalin Group Inc. to set up a base for its troops.

The Montreal-based engineering and construction firm provided logistics support and built the Camp Julien military base on a rubble-strewn stretch of land on the western edge of Kabul. Working under the constant threat of attack near homes shattered by previous conflict, they set up everything the Canadian army would need: Sewage system, power supply, dining and washing facilities, a helicopter pad and a makeshift hockey rink.

SNC-Lavalin had responsibility for much of the infrastructure and services that people relied on. The company used its expertise operating in some of the world's most remote environments and even hit on a side business, selling the crystal-clear water tapped from deep underground wells on site to buyers such as the French military. SNC-Lavalin's work was pivotal to the Afghan mission, said David Perry of the Canadian Global Affairs Institute, who has studied private contractors' role in military operations. "Working out all of that kind of back end support is critical to operational success."

Today, SNC-Lavalin is at the centre of a raging legal and political fight . The company faces the prospect of a multiyear trial on corruption and fraud charges that could undermine its ability to win new contracts.

A conviction could, tear the company apart. It wants to negotiate an out-of-court settlement (called a deferred prosecution agreement, or DPA) that would avoid a criminal trial and spare what it calls its "innocent" stakeholders. But its attempts to do so have created a heap of trouble in Ottawa.

Prime Minister Justin Trudeau and his staff repeatedly pressed then-attorneygeneral Jody Wilson-Raybould to intervene in SNC-Lavalin's case and negotiate a settlement, according to Ms. Wilson-Raybould's testimony before a House of Commons committee this week. For four months, she said: "I experienced a consistent and sustained effort by many people within the government to seek to politically interfere in the exercise of prosecutorial discretion in my role as the Attorney General of Canada in an inappropriate effort to secure a deferred prosecution agreement with SNC-Lavalin."

Her account of the Prime Minister and his staff trying to influence the handling of a criminal case on behalf of a large corporation based in his home city has landed the government in its biggest controversy since it took office in 2015. Mr. Trudeau's motivations, it seems, were both political and economic.

SNC-Lavalin has symbolic importance in Quebec, as one of the largest truly global companies to have its headquarters in the province. And there are thousands of jobs involved. In a Sept. 17 meeting between Mr.

Trudeau and Ms. Wilson-Raybould, she said he raised both issues. "The Prime Minister asks me to help out - to find a solution here for SNC - citing that if there was no DPA there would be many jobs lost and that SNC will move from Montreal," she testified.

But how real is that threat?

After the RCMP charged SNC-Lavalin with corruption and fraud in 2015, the company raised the possibility, both internally and to federal officials, that it might sell itself or move its headquarters to Britain if forced to endure a potentially damaging trial ending in a conviction. That would not be easy, however. A $1.5-billion loan agreement with the Caisse stipulates that SNCLavalin has to keep its base in Montreal until at least 2024 (though such agreements can be renegotiated).

SNC-Lavalin is undeniably an important company in Canada. But its importance has been shrinking, at least in terms of employment. Since February, 2012, when SNCLavalin first disclosed it had discovered financial irregularities it couldn't explain, namely undocumented payments later discovered to be bribes, the company's payroll in Canada has declined by more than half, to roughly 8,500 people from 20,000. It currently employs about 2,500 people in Quebec, including 700 at its Montreal head office. Five times as many SNC-Lavalin employees work outside the country as in it.

Despite that employment decline, political leaders in both Ottawa and Quebec City appear determined to protect SNC-Lavalin. Even amid accusations of improper interference in the justice system, the Trudeau government said this month that it could still order the director of public prosecutions to settle the case against SNC-Lavalin without a trial. It's also looking at changing federal procurement rules to give the government more leeway in deciding bans on suppliers convicted in court.

In the provincial capital, the new Legault government, which has pressed Ottawa to give SNC-Lavalin a negotiated settlement, calls the builder one of roughly 10 companies "strategic" to the Quebec economy. With the company's stock price at low levels not seen in a decade, it has vowed to shield SNC-Lavalin from any unwanted takeover attempts. Quebec pension fund Caisse de dépôt et placement du Québec, SNC-Lavalin's biggest shareholder with a stake of nearly 20 per cent, said it will be "a rock" for the company and that it has "a lot of potential in the long run."

Beyond political calculations and history, the key to understanding why these governments and institutions would go to such lengths to protect SNC-Lavalin lies in the numbers and in the kind of work it does. For all of its stumbles, SNC-Lavalin was vital in the build out of modern-day Canada. Without it, the country's engineering and construction landscape could become a messier and more expensive place to do large-scale projects - even if the talent that makes the company what it is, the people, would carry on with other companies.

"SNC-Lavalin contributes every day to every facet of Canadian life," Neil Bruce, the company's chief executive, said in an internal video published last October. He suggested that the company's future growth might not pass through Canada if it is banned from federal government contracts. SNC-Lavalin declined to make Mr.

Bruce available for an interview for this story.

Its head office includes the type of workers Premier François Legault covets as he tries to produce more jobs paying $50,000 a year or more for Quebec's economy and close the average wage gap with Ontario.

As Quebec Economy Minister Pierre Fitzgibbon put it in an interview with The Globe and Mail in January: "This is his obsession."

Moving its headquarters would complete a shift of operations away from Canada that's been happening through natural growth, as well as through mergers and acquisitions. Following SNC-Lavalin's purchase of U.K-based engineering firms Kentz Corp. in 2014 and WS Atkins in 2017, SNC-Lavalin now employs about 10,000 people in Britain, more than in Canada. It just opened a new office in London.

"We've expanded as a company but we've expanded internationally with international clients" in recent years, Mr. Bruce said. On the company's fourth quarter conference call Feb. 22, he said although the company would welcome an out-of-court deal, it is now mainly focusing on the coming trial. A special committee of directors is also readying backup plans to protect shareholder value.

Mr. Bruce, a Scotsman hired by SNC-Lavalin in 2013 from Britain's AMEC Plc, apologized for the company's darker past in an open letter to Canadians published last fall. "The truth is, the events prior to 2012 that led to the federal charges should never have taken place," he said.

Former SNC-Lavalin executives went to great lengths to curry favour with Libya's former dictator, Moammar Gadhafi, and his playboy son Saadi. But the SNC-Lavalin bosses also tried to pass off the pandering as a legitimate business expense. Court testimony from one of those executives reported in Montreal's La Presse sheds new light on the effort the company made to keep Saadi happy when he came to Canada for a visit in 2008, including paying for his prostitutes and pocket money.

Mr. Bruce insists SNC-Lavalin has undergone a profound shift in its corporate culture, governance and internal controls over the past five years, with a new board and new senior management. The company is now subject to external monitoring as part of an administrative agreement with the federal government that allows it bid on federal work while the court case continues.

SNC-Lavalin has not shied away from playing the economic nationalism card as public scrutiny of its business intensifies. Among the company's major Canadian contributions it has highlighted in recent weeks is the massive Manic-5 hydroelectric dam in Quebec, Ontario's Darlington nuclear generating station, the Husky Lloydminster Refinery in Alberta and Vancouver's SkyTrain transit system.

The company is working on seven of the 10 biggest construction projects underway in Canada, according to data from infrastructure trade publication ReNew Canada.

Total value of the projects: $66.8-billion.

"It think it speaks to their expertise and I think it speaks to the type of work they're doing" in this country, said Andrew Macklin, ReNew's managing editor. Most of those top 10 projects are big energy and transit projects, he said. Project owners involved value SNC-Lavalin's skill set and what they bring to the table, he said.

SNC-Lavalin is one of only a dozen largescale infrastructure companies worldwide and the only one in Canada capable of taking a project from start to finish, according to analysts. And while that doesn't mean the company's continued presence in the country is necessary to keep building new power plants and subway systems, its absence would surely be felt, especially on major projects where it partners with others.

"It's healthier moving forward with large scale infrastructure projects when there's competition in the bid," Mr. Macklin said. "You don't want to be in a position ever where you're doing a multi-billion project and you only have one consortium that comes forward that's qualified to do so. I think that's where the real potential risk here is."

That sentiment is echoed by Benoit Poirier, an analyst at Desjardins Capital Markets. He said sponsors of major recent projects in Canada such as Montreal's Réseau Express Métropolitain (REM) transit project and Toronto's Eglinton LRT received bids from only two groups in the tendering process, reflecting a preference by engineering and construction companies to work in partnership on major contracts.

Take SNC-Lavalin out of the mix and you could ultimately reduce the competitiveness of bids, he said.

The company was chosen as part of winning consortiums for both the REM and Eglinton LRT. Still, Canadian contracts have shrunk in importance in tandem with its workforce. Canada made up 31 per cent of SNC-Lavalin's $9.3-billion in revenue in 2017, down from 66 per cent in 2013, according to Desjardins. Mr. Poirier estimates federal work represents no more than half of the Canadian total. The company doesn't disclose the value of its work with the Canadian government.

Among the biggest pieces of federal work is SNC-Lavalin's role in building Montreal's new Champlain Bridge. Federal procurement records show the company is also executing dozens of other contracts, many of them tiny, three or four-figure deals such as washing windows in federal buildings and inspecting fire systems.

For investors, the Canadian work is peanuts. Most of the company's market value is tied to SNC-Lavalin's 16.76 per cent stake in Ontario's Highway 407 toll road, which stretches from Burlington to Pickering and gives paying motorists a way to bypass the area's more congested arteries. It is a money machine for its owners, including Spain's Ferrovial SA and Canada Pension Plan Investment Board. Analysts estimate SNC-Lavalin's stake is worth about $5-billion or $28.50 per share (the company's stock closed the week at $36.57). The highway generated a profit margin of 41 per cent on revenue of $382.7-million in the third quarter ended Sept. 30.

Desjardin's Poirier said he believes SNCLavalin could handle any potential ban from federal contracts if it were found guilty on the criminal charges. He said SNC-Lavalin management indicated to him in a meeting that it would be able to diversify the balance of its exposure away from Canada to other regions over a threeyear period.

There's also a possible backdoor to Canada. If no out-of-court settlement is struck and SNC-Lavalin is found guilty after a trial, a federal ban would apply to the legal entities charged. In this case that is SNC-Lavalin Group Inc., division SNC-Lavalin Construction and subsidiary SNC-Lavalin International. Analysts such as Derek Spronck at RBC Dominion Securities say they believe its British business would be excluded from a ban.

"With the EU trade agreement with Canada that was recently enacted, the Comprehensive Economic and Trade Agreement allows for European companies to bid on Canadian government contracts," Mr.

Spronck said in a research note. "We see the potential ... for SNC to still bid for Canadian federal contracts through its other legal entities, which now includes WS Atkins."

But there's another problem. If SNC-Lavalin ran away from the fire here, it would still face the prospect of being blacklisted by international clients, who might have policies preventing them from doing business with convicted suppliers. Criminal charges alone have cost the company an estimated $5-billion in lost business as rivals seize on SNC-Lavalin's legal uncertainty, Mr. Bruce has said. An actual conviction would be worse.

"We believe SNC-Lavalin will struggle to win projects and attract new fundamental investors for as long as its legal troubles persist," Raymond James analyst Frederic Bastien said in research published this month, adding that politicization of the company's situation dims the chances for a settlement. "The scandal lends itself well to campaign-time propaganda."

Mr. Bruce isn't as pessimistic. SNC-Lavalin's backlog of work won worldwide but not yet completed stood at $14.9-billion at the end of December. And he says the company continues to win its share of contracts. "We're very, very confident around a number of prospects both inside Canada and internationally," he told analysts Feb.

22.

That's not the case in Saudi Arabia, however. There is real concern about SNC-Lavalin's ability to secure new work there because of a diplomatic fallout between Canada and the Middle East kingdom. The company has roughly the same number of employees in Saudi Arabia as it does in Canada, and a deterioration in its prospects there led to a recent $1.24-billion writedown in its oil and gas division.

Despite the fact governments in power stand to be embarrassed if SNC-Lavalin picked up and left Canada, the country could probably handle such an exit from an employment perspective.

Engineers Canada, the national organization of engineering regulators, projects in its latest labour market study that job openings for the profession's 14 specialities, including civil, mechanical, electrical and chemical engineering, will top 9,000 a year until 2020 before tapering off. That means if SNC-Lavalin's engineering staff in Canada were to be laid off tomorrow, demand for their expertise is high enough that all of them could potentially find jobs quickly.

Prime Minister Justin Trudeau's argument that he sought a settlement of SNCLavalin's criminal charges to preserve head office jobs at the company was dismissed by former SNC-Lavalin insiders.

"The jobs issues is simply a deflection, a red herring," said Ted Gamble, who worked as an engineer for SNC-Lavalin until 2012, then moved to a rival company's project in New Brunswick.

Mr. Gamble said SNC-Lavalin has been moving decision-making executives from Canada to England as part of a global growth strategy since buying Atkins for $3.6-billion. "SNC is clearly going to maintain a [regional] Montreal office, and to the extent skilled employees lose their jobs, they're going to find work at Hatch or WSP."

Reaction to SNC-Lavalin's legal woes from current and potential customers and investors has been mixed.

Vancouver-area mayors last month urged the Lower Mainland's transit agency to make sure it isn't forced to use SNC-Lavalin for a $4-billion transit Skytrain extension project. "There is yet another federal scandal involving this company and it does not instill confidence out in the public," said Port Moody Mayor Rob Vagramov.

Meanwhile, equity investors continue to have questions about the company's plans and opportunities. At a private meeting between SNC executives and investors organized by National Bank of Canada earlier this week, David Taylor of Taylor Asset Management said Mr. Bruce and his team appeared dead on their feet and focused on what's going wrong instead of on what's going right.

"Neil is, and rightfully so, he's beaten up and he's bruised and he's battered," Mr.

Taylor said. "If it got heated it's because I think they could have probably done a better job of talking about all the positives and all the opportunities. ... I think they're in a bind here. They're in a tough position. But they've got some great assets. And they spent all their time talking about what's gone wrong."

Others are voicing their support for SNCLavalin. Their general thinking: The company's ability to deliver big ticket projects matters more than what happened in Libya under departed management.

Right now, the largest infrastructure project in Canada is the $12.8-billion refurbishment of the Darlington nuclear power plant in the Toronto suburbs and SNC-Lavalin is involved. The facility produces approximately 20 per cent of Ontario's electricity. Ontario Power Generation, a government-owned utility better known as OPG, runs the power station.

"OPG's project partners are crucial to the success of the refurbishment," spokesman Neal Kelly said in an e-mail. "SNC Lavalin Nuclear is part of the CanAtom Power Partnership Group, which is the key partner on this project. We have completed more than 70 per cent of the work and the refurbishment project is tracking on time and budget."

Ontario's other major nuclear operator is Bruce Power LP, which handed responsibility for a $475-million renovation of its reactors to a consortium led by SNC-Lavalin this past June, more than three years after prosecutors filed criminal charges against the company. SNC-Lavalin and its partners have shown "the experience, commitment and dedication to safety, quality, productivity and innovation" allowing the project to be on time and on budget, Bruce Power spokesman John Peevers said Friday.

Caisse de dépôt, SNC-Lavalin's biggest shareholder, is counting on the company to help deliver its $6.3-billion REM , a 67km light rail project in Montreal. Construction has begun with a view to carrying the first paying passengers in 2021.

Bay Street analysts, who work closely with the companies they cover, expect the Liberal government will find a solution to SNC-Lavalin's legal woes that wouldn't be as damaging as a maximum 10-year ban on bidding for federal contracts.

In a report, CIBC World Markets Inc. analyst Jacob Bout said Public Services and Procurement Canada are finalizing a new regime for sending corporations into the penalty box. "The proposed changes would give the government greater discretion to decide on whether a ban makes sense, and if so, an appropriate length of time."

The Liberals have promised to spend $180-billion on infrastructure over the next decade. Analysts expect SNC-Lavalin will win its share of these Canadian government mandates, along with projects outside Canada. New infrastructure assignments are expected to offset a potential decline in SNC-Lavalin's sales to mining and oil and gas companies, which are dealing with low prices for commodities.

CIBC's Mr. Bout forecasts SNC-Lavalin's revenues from infrastructure projects will increase by 13 per cent to $2.5-billion in 2020. He also predicts SNC-Lavalin will boost revenues from nuclear projects by 27 per cent to $1.2-billion next year.

The company became the dominant domestic player in the sector in 2011 when it bought Atomic Energy of Canada Ltd. from the federal government. Annual sales from SNC-Lavalin's clean energy group are seen by analysts as doubling, to $888-million.

Over all, CIBC expects SNC-Lavalin's revenues will rise by 3 per cent next year, to $10.4-billion, reflecting weakness in commodity-linked sectors. Up and down Bay Street, most analysts assume SNC-Lavalin can continue to sell its services to government-controlled entities and the world's largest utilities.

Finally, there is the issue of competition.

There is a view among political leaders in both Quebec City and Ottawa that Canada needs to level the playing field for home-grown companies competing against rivals in countries that already make use of out-of-court settlements for corporate offenders, or so-called deferred prosecution agreements. That includes the U.K., the United States and France.

Former federal attorney-general Jody Wilson-Raybould faced pressure to make use of DPAs as corporate get-out-of-jail cards long before Mr. Trudeau began banging the drum for SNC-Lavalin. In a 2017 letter to Ms. Wilson-Raybould, former CEO of the Business Council of Canada John Manley said: "The fact that DPAs already are in use in several OECD countries puts our firms at a competitive disadvantage."

"It's been no secret that the Trudeau government wants to make sure that there is some mechanism available for SNC to deal with this issue," said one lawyer specializing in white collar defence, who was granted anonymity because he was not authorized to discuss the matter publicly.

"There is generally a recognition [in other countries] that this is the way to deal with these issues when you're dealing with companies."

So why did federal prosecutors decide not to give SNC-Lavalin a deal? The company maintains it does not know. But by law, prosecutors are not allowed to consider national economic interests when deciding whether to settle with a company. The lawyer said that one factor against SNC is that the company remains in the headlines and is still being investigated by police for past practices. Under these conditions, a settlement would not be understood by the general public.

"I think in the mind of the prosecutor here, they want a criminal conviction on the record," the lawyer said.

"There's still a high-profile element to it.

And it may have been the prosecutor's thinking that we want to make an example out of this."

Associated Graphic

Montreal-based SNC-Lavalin has provided infrastructure in places such as Afghanistan and Montreal, seen above.

CHRISTINNE MUSCHI/THE GLOBE AND MAIL

Top: Construction crews work on SNC's Réseau Express Métropolitain light-rail project in Pointe Claire, Que. Above: After SNC was charged in 2015, the company suggested to both internal and Canadian officials that it might move its headquarters overseas if it was forced into a trial that was damaging to its reputation.

TOP: CHRISTINNE MUSCHI/THE GLOBE AND MAIL; ABOVE: ANDREW TESTA/THE GLOBE AND MAIL

THE GLOBE AND MAIL, SOURCE: ANNUAL REPORTS


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JUSTICE, JOBS AND SNC-LAVALIN
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By NICOLAS VAN PRAET, ANDREW WILLIS
  
  

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Saturday, March 2, 2019 – Page B1

Prime Minister Justin Trudeau has landed in hot water for his government's efforts to protect the engineering giant from a criminal trial. His defenders say he's trying to protect thousands of jobs. The economic facts are more complicated.

Nicolas Van Praet and Andrew Willis report B6

Associated Graphic

MARK BLINCH/THE GLOBE AND MAIL


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Canaccord head of research to retire in March
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Monday, February 25, 2019 – Page B6

A changing of the guard is coming in the research team at Canaccord Genuity Group Inc. as long-time telecom analyst and department head Dvai Ghose steps down at the end of March and cannabis analyst Derek Dley becomes head of the investment bank's Canadian research group.

Mr. Ghose was a top-ranked analyst for much of his 25-year career and has run the research group at Canaccord and a predecessor firm since 2006. In 2015, he gave up covering companies to become Canaccord's head of strategic development and leader of the global-research team of 80 analysts who cover more than 1,000 companies. In an internal note. Canaccord chief executive Dan Daviau praised Mr. Ghose for his key role in building the trading platform that will support the firm's "longer-term fintech strategy."

"As global head of research, Dvai has been successful in elevating our research brand and harnessing synergies with our partners in Canada, the U.S., U.K. and Australia," Mr. Daviau said. "He was lauded for his ability to sell a good story and wellrespected for his independent views."

Equity-research analysts, and their colleagues in institutional sales and trading, face enormous professional challenges as technology, the growing popularity of passive-investment strategies and increased regulation combine to put downward pressure on compensation in what was once a lucrative line of work. Analysts are coping with tactics that include covering an increasing number of stocks with a combination of senior and junior staff, and focusing on larger investment themes, rather than quarterly financial results.

When Mr. Ghose departs, Mr. Dley will become a player-coach as head of the domestic-research team and an analyst on consumer-product and cannabis stocks. He has spent the past 12 years on Bay Street and holds the CFA designation.

In addition, Canaccord plans to expand the role of Kelly Bourque as head of business management in the research department. She will work with Mr. Dley in running the group on a day-to-day basis, improving the quality of communication to clients and co-ordinating coverage with Canaccord analysts outside Canada.

Publicly traded Canaccord is Canada's largest independent investment bank, with approximately 1,600 employees, a market capitalization of $770-million and a wealth-management division that oversees $60-billion of client assets.

Mr. Ghose has not announced his future plans, but if he follows the trail blazed by a number of other former peers, his next career may be outside investment banking.

Last spring, former analyst and head of research Quentin Broad stepped down as head of institutional equity sales at CIBC Capital Markets to become managing director of the charity Capitalize for Kids, an organization focused on childhood mental-health issues. After Mr. Broad left, CIBC gave his responsibilities to head of institutional trading Ryan Fan.

In the fall, Daniel Kim ended a 17-year run as head of research and tech analyst at independent investment dealer Paradigm Capital to become executive vice-president of corporate development at Baylin Technologies Inc., a wireless technology company based in Toronto. Mr. Kim covered the company for six years before jumping aboard. Paradigm appointed Corey Hammill as its head of research; he also covers the airlines, consumer product and infrastructure stocks.

1,600 Canaccord is Canada's largest independent investment bank, with about 1,600 employees.


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For Economical owners, windfall from planned IPO continues to shrink
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By CLARE O'HARA, ANDREW WILLIS
  
  

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Tuesday, February 19, 2019 – Page B1

For a handful of its clients, the planned public-market debut of Economical Mutual Insurance Co. is a long-promised lottery win that keeps shrinking in size.

Economical is the country's eighth-largest auto and home insurer, with an estimated value of up to $1.9-billion. The Waterloo, Ont.-based company, founded in 1871, has spent the past nine years on an occasionally dramatic journey toward an initial public offering; at one stage, the company parted ways with its chief financial officer over allegations he leaked confidential information on the IPO.

When Economical started down this road, the insurer's 878 owners - clients who are known as mutual policy-holders - had well-founded reasons to believe they were each in line for a $1-million-plus windfall. But over time, a series of setbacks, which included new federal regulations and the planned launch of a $100-million charitable foundation funded by Economical's policy-holders, trimmed the expected individual payouts to between $300,000 and $430,000.

In a vote scheduled for March 20, Economical's owners will decide whether to accept this diminished pot or turn down the planned IPO and get no cash at all, in hopes of negotiating a better deal. In an e-mail, Economical chairman John Bowey said: "Our eligible mutual policyholders will either vote to move forward, or the entire process will come to a halt."

Smaller slices of Economical's IPO pie are particularly galling to a well-organized group of approximately 150 policy-holders who lobbied aggressively for the IPO since 2010, working with Toronto-based shareholder-rights firm VC & Co. and lawyers at Voorheis & Co. These individuals are largely industry insiders, including insurance brokers and retired insurance-company executives, who bought Economical policies knowing that they were potentially worth $1-million or more if the company went public.

While none of these customers were willing to speak on the record ahead of the vote, over concerns about showing their hand while still trying to negotiate with Economical, an informal survey shows most owners plan to swallow their concerns and vote in favour of the IPO. For the plan to go forward, twothirds of the mutual policyholders must approve it. In part, this grudging support reflects the fact that almost all of Economical's mutual policy-holders are in their 60s and 70s, and want to cash in on a prize while they can still enjoy it.

Economical is a property and casualty (P&C) insurer, and it's the first Canadian P&C company owned by policy-holders to stage in IPO, a process known as demutualization. Four domestic life-insurance companies demutualized 20 years ago.

Economical was founded in 1871 when farmers near Berlin, Ont., (now Kitchener) needed fire insurance on their barns.

From the moment the company began discussing demutualization in 2010, there has been a raging debate over how Economical's capital, built up over 148 years, should be divided.

The debate was fuelled by the fact that when Economical began the IPO process, there were no federal regulations around demutualization at P&C insurers.

The federal Finance Department subsequently ruled that all policy-holders who contributed to building an insurer's capital base should receive a share of the company's surplus money. This meant mutual policy-holders who previously were entitled to 100 per cent of the company would have to share the proceeds of the IPO with the rest of Economical's customers.

After months of negotiations between its two policy-holder groups, Economical announced in late January it would split the pot, with mutual policy-holders receiving between $300,000 and $430,000 in shares or cash for their stakes in the company. A second group of approximately 630,000 non-mutual policyholders, who are not legal owners of the firm but did contribute to building its value, will each get $1,500 to $2,300. The vast majority of Economical's customers are farmers, homeowners and drivers who are likely unaware their policies have any value.

In what the company described as a critical step in the negotiations, committees representing the two policy-holder groups also agreed to set aside $100-million to fund philanthropic work through the newly established Economical Insurance Heritage Foundation. "It's our understanding that the concept of social good was a common ground for both policyholder committees," Mr. Bowey said. "Although Economical was not a part of that decision, we were pleased to see the committees make it, as it aligns with Economical's values to give back to the communities in which we live and work."

A small number of Economical policy-holders, whom The Globe and Mail is not naming because they are still working on their strategy, said they plan to oppose demutualization at the March 20 vote because it undervalues their stake in the company. Some members of the group said they want the $100-million set aside for the foundation to instead be given to policyholders.

"We do not believe this perspective is representative of the views of mutual policy-holders generally," Mr. Bowey said. Under the regulations that govern demutualization, Mr. Bowey said Economical cannot rework the terms of the planned IPO, including the creation of the foundation.

If two-thirds of Economical's mutual policy-holders approve the IPO plan in March, there will be one final vote by all policyholders before the company lists its shares and launches a foundation. If each policy-holder vote is in favour of an IPO, Economical expects to list its shares on the Toronto Stock Exchange in 2020.

To date, Economical has spent more than $20-million on preparing to go public. The company started down the road to demutualization as a way to raise the capital needed to keep pace in an insurance industry that is consolidating around its largest players. Mr. Bowey said: "Becoming a public company will allow us to unlock our full potential and compete with the multinational companies operating in our market."

Economical has a 4-per-cent market share, according to a survey conducted by the company.

Publicly traded Intact Financial Corp. is the country's largest P&C insurer, with 14 per cent of the market.

Economical does business under a number of brand names, including online division Sonnet Insurance; a Quebec unit known as Missisquoi Insurance Co.; British Columbia-based Family Insurance Co.; and Petline Insurance, the country's oldest and largest insurer for dogs and cats.

The company has $5.6-billion in assets and posted a loss of $93-million in 2017; it has yet to report 2018 results.


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Toronto investment bank Infor prepares for wave of corporate credit restructurings
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Monday, February 18, 2019 – Page B2

Infor Financial Inc. sees trouble brewing in the corporate credit market.

In a contrarian move, the Toronto investment bank recently launched a restructuring business to advise financially distressed companies.

It's rare to see a business run into credit difficulties these days, as interest rates remain low by historic standards and corporations enjoy easy access to debt. But Infor is betting North America's decade-long credit-fuelled party is about to end and a nasty hangover is coming.

Toronto-based Infor hired Paul Liebovitz, who has worked on many of Canada's largest corporate meltdowns, in early February as head of a newly established recapitalization and restructuring group. Over a 30-year career, Mr.Liebovitz has both advised troubled companies and invested in distressed debt.

Infor was founded in 2015 and focuses on providing merger and acquisition and financing advice to growth companies in the mining, financial services, cannabis and technology sectors. The employee-owned firm is home to two dozen bankers and has advised on 1,800 transactions valued at $250-billion. Chief executive officer Neil Selfe said the decision to move into restructuring reflects a view that a downturn is overdue in credit markets.

"We believe the current economy cycle, bolstered by extended periods of low interest rates and excess leverage, is in its final stages and a substantial corporate restructuring pandemic is nearing," Mr. Selfe said. Infor is well positioned to advise distressed borrowers, he said, because "as the largest providers of debt, Canadian banks are conflicted in helping corporations navigate this environment."

Ratings agencies are sounding a similar warning on debt levels. Corporate borrowing is at a record high as a percentage of GDP. Standard & Poor's Financial Services LLC projects US$4.88-trillion of corporate debt will come due at North American corporations over the next four years, including US$1.55-trillion of high yield debt. In a report issued in August, S&P said there are "concerns that highly leveraged companies could be squeezed by the rising costs of borrowing in increasingly volatile credit markets."

Infor's Mr. Selfe said his firm's research shows Canadian banks have already begun pulling back on lending to non-investment grade companies.

He said it's likely that in the near future, "issuers have to roll over debt at higher rates, and potentially in a recessionary environment."

The next downturn in credit markets will be the first test of a new breed of non-traditional lenders such as private equity funds that took advantage of easy access to capital over the past decade and began competing with banks by making loans in what's known as the private debt market.

These lenders have advanced a significant amount of money - data service Preqin estimates the 100 largest private debt funds have raised US$686-billion since 2009 - and a recession will reveal who really understands covenants, collateral and the other characteristics that separate reliable borrowers from corporate deadbeats. Mr. Liebovitz said Infor plans to build strong relationships with private-debt funds.

When the next credit crunch plays out, corporations will find some of the bankers they looked to during the last credit crisis in 2008 have moved on. There are relatively few specialists in distressed situations and two seasoned advisers - former Canaccord Genuity Group Inc. executives Barry Goldberg and Phil Evershed - left the independent dealer in 2015 to work for private equity firm PointNorth Capital Inc. BMO Nesbitt Burns Inc. also has an experienced restructuring group, but can run into conflicts when advising on the fate of troubled loans made by the parent bank.

Mr. Liebovitz joined Infor after serving as chief operating officer at credit-focused hedge fund Fiera Quantum Limited Partnership, which was formerly GMP Investment Management.

The fund was a central player in the restructuring of Canada's asset-backed commercial paper market following the global financial crisis. Prior to that, he ran a mezzanine debt fund at Toronto-Dominion Bank.

Earlier in his career, Mr. Liebovitz was at Bank of Nova Scotia and worked on some of the country's most complex restructurings, including workouts of Unitel Communications Inc. and real estate company Olympia & York Developments Ltd.


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Frank Stronach's granddaughter joins family feud, files suit against aunt Belinda
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Thursday, February 14, 2019 – Page A1

The youngest member of the Stronach clan has added another strand to a web of lawsuits over control of the family fortune, as 18-year-old Selena Stronach went to court last week with a suit aimed at maintaining a jet-set lifestyle and limiting the role of her aunt Belinda Stronach, who is currently running the family's billion-dollar horse-racing, real-estate and farming business.

Selena Stronach is one of the three grandchildren of Magna International Inc. founder Frank Stronach. She is staking her territory in a continuing family feud at the same time her father, Andrew, Frank's only son, and mother, Kathleen, are divorcing. Selena Stronach's lawsuit against her aunt was filed in early February, four weeks after her mother filed a claim for support from her husband's family.

Kathleen Stronach's claim focused on maintaining a lifestyle that includes a 15,000-square-foot home in Aurora, Ont., with five staff, including a chef, two luxury cars, and vacation homes in Palm Beach, Fla., and Muskoka. She and her daughter receive $15,000 a month in direct transfers from the family's private holding company, The Stronach Group, plus unrestricted use of credit cards, and private jet flights for monthly vacations at five- and six-star hotels. In the divorce claim, Kathleen Stronach said her daughter owns a ranch with one fulltime employee, where she raises cattle that are shown in country fairs, and "the operation is expensive to run."

In a separate filing, Selena Stronach asked the Ontario Superior Court of Justice to ensure that Belinda Stronach "pay or reimburse Selena for personal expenses that have historically been paid or reimbursed on her behalf through the trusts and/or The Stronach Group." The filing also asked that Selena Stronach be given full access to the family's financial affairs and be allowed to name an independent trustee to monitor the family business on her behalf.

In an e-mail, Belinda Stronach said: "These legal actions were anticipated because my brother and his wife are not yet legally separated, and my niece has just turned 18. Their individual family arrangements are up to them."

She said: "We have provided my father and my brother with detailed financial information over many years, which is well documented. We continue to manage our business and trusts with transparent financial principles and good governance and defend against untrue allegations."

For Selena Stronach, the potential divorce of her parents has significant financial implications. Andrew and Kathleen Stronach married in 1997 and separated in 2009, court documents show.

That year, the couple initially retained lawyers, but in her January divorce filing, Kathleen Stronach said "the legal separation process was halted by an intervention by Frank."

According to Kathleen Stronach's court filing, her father-in-law said: "If she litigated, things would not go as she wanted, however, if she did not do that, and instead let go of her lawyer, he would make sure that all of her and Selena's needs would always be taken care of. ... "It was not until she recently retained counsel that Kathleen understood that there was a limitation period" to claims for support, according to the court filing. Her lawyers said: "Kathleen is asking this court to extend the limitation period so that she may pursue her claims, now that she understands her rights."

Gordon Capern, Andrew Stronach's lawyer, said on Wednesday: "Kathleen and Andrew have an amicable relationship and given the current circumstances, Andrew anticipated that Kathleen would seek to ensure she continued to receive support.

Andrew is optimistic that this situation will be successfully resolved for all concerned."

Selena Stronach's suit against her aunt is the latest in a series of court cases that started in October, when Frank Stronach and his wife, Elfriede, asked the court to remove their daughter as chair and president of The Stronach Group and the trust funds and put the 86-year-old entrepreneur back in charge. The couple also demanded their daughter and former Stronach Group chief executive Alon Ossip pay $520-million in damages. As part of that legal action, the pair sued Belinda Stronach's children to gain control of their trusts.

Frank Stronach cut ties with Magna in 2011, selling stock worth approximately $1.6-billion. He gave up all formal responsibilities at the family businesses in 2013, when he made a brief foray into politics in his native Austria. In the opening salvo of what has become an increasingly bitter family feud, Frank Stronach said that after he left, his 52-year-old daughter and Mr. Ossip "seriously neglected the business of The Stronach Group and abused their positions of authority."

Andrew Stronach, aged 50, subsequently joined forces with his parents, accusing Belinda Stronach and her perceived allies of "serious misconduct" in a court filing that also asked for Frank Stronach to be installed as head of the family business. None of the claims have been heard in court.

"Selena and Andrew Stronach are aligned in their interests and common concerns," Mr. Capern said.

Belinda Stronach has consistently stated that she is running the family businesses in a manner that will preserve wealth for future generations, while her father is risking the family fortune by investing in ventures such as a grass-fed cattle ranch, electric bicycles, a pumpkin seed oil business and a Florida golf course. In a statement of defence filed last month, Ms.

Stronach said: "Frank's improvident spending and unsound business decisions have reduced the family net worth by a staggering US$580-million (or ~C$800million)."

The Stronach family owns six U.S. race tracks, along with media and gambling businesses linked to thoroughbred racing.

The media and gambling businesses have almost doubled sales over the past five years, with revenues of US$1.1-billion in 2017. The family company also has extensive real estate holdings.

Associated Graphic

The Stronach Group chair Belinda Stronach, seen in Baltimore last May, says she is running the family businesses in a way that preserves wealth for future generations while her father, Frank, is taking risks on ventures such as electric bikes.

PAUL MORIGI/GETTY IMAGES


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Anson Advisors urges TSX to scrutinize planned Acasta debt-for-equity swap
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Wednesday, February 13, 2019 – Page B3

Hedge-fund manager Anson Advisors Inc. is asking the Toronto Stock Exchange to intervene in a planned refinancing of troubled Acasta Enterprises Inc. by the company's newly minted co-CEOs.

Anson took aim Tuesday at a proposal that would see Acasta co-chief executives Charles and Richard Wachsberg, who are twin brothers, convert $4.8-million of high-yield debt in a company they indirectly control into 6.5 million additional Acasta shares. Toronto-based Acasta was once Canada's largest special acquisition corporation, or SPAC, with a $402-million war chest and an all-star list of backers, but now sports a market capitalization of just $55-million.

Last week, Acasta announced the debt-for-equity swap and said it would increase the Wachsberg brothers' stake to 41.2 per cent from 36 per cent. At the time, Acasta said the financing would be "exempt from the formal valuation and minority approval requirements." Anson, which owns an 18-percent stake, said on Tuesday that the TSX should "require that Acasta obtain disinterested shareholder approval" of the transaction. "The intent and effect of the debt conversion transaction proposed by the Wachsbergs is to transfer value from Acasta and its minority shareholders to themselves," Anson said in a news release. Anson declined further comment on its request. Acasta executives also declined to comment.

Acasta was originally backed by a long list of business luminaries, including former Onex Corp.

executive Tony Melman, former federal Liberal cabinet minister Belinda Stronach and CEOs from banks, industrial companies and airlines. The SPAC went public at $10 a share in 2015, and now changes hands at 85 cents.

All of Acasta's original backers have lost money on the SPAC: Their paper losses run from $1-million to $15-million.

In 2016, Acasta acquired a collection of businesses for $1.1billion. It borrowed heavily to buy an aircraft leasing firm, a company that made laundry soap and dishwasher detergent and a private-label shampoo and soap maker named Apollo Health & Beauty Care Inc., which was owned by the Wachsberg brothers. The SPAC paid $390-million for Apollo, with 63 per cent of the purchase price paid in Acasta shares and the remainder in cash. Most of those businesses were subsequently sold to pay down debt, and Acasta's founder departed, until only Apollo was left in the fold.

In late December, Acasta announced that its board members and the Wachsbergs "were not able to agree on strategy going forward," and all of its directors stepped down. A new board was appointed, consisting of financier Stan Bharti, Carlo LiVolsi, Jeffrey Spiegelman, Richard Wachsberg and Charles Wachsberg. The new board appointed the Wachsbergs as co-CEOs. Charles Wachsberg and Mr. Barti are also both directors of oil and gas company Blue Sky Energy Inc.

In Tuesday's news release, Anson said Acasta worked on a potential sale of Apollo in December that would have generated enough money to pay down all of the SPAC's remaining debt and provide equity holders with $1.48 a share. That transaction died when the board of directors was replaced.

Anson said the new board and the new CEOs were appointed "without any prior consultation with shareholders and without any disclosure being provided to shareholders about the qualifications and experience of those individuals."


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The Bay Street fumble: $500,000 Super Bowl pot goes missing
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By TIM KILADZE, ANDREW WILLIS
  
  

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Monday, February 11, 2019 – Page A1

Two days before the game, word started to spread: The pot had gone missing.

Every year around the Super Bowl, Bay Street stock traders and their friends participate in a high-stakes pool.

Run by an old-school floor trader from the Toronto Stock Exchange, the private gambling affair is highly exclusive, and entry is open only to those with the right connections.

Given the clientele, it is no pedestrian affair. A hundred slots are up for grabs at $5,000 a piece - payable in cash. The total pot is $500,000.

For many years - possibly even decades, no one can quite remember when it began - the pool has run without a hitch.

But this February, the ritual fell apart. On the Friday before the Super Bowl, according to multiple pool insiders, the organizer shared the news that the prize money had disappeared. The reason given: He'd been robbed.

The mystery of what happened to the Super Bowl cash is captivating Bay Street.

A number of pool participants who spoke to The Globe and Mail were granted anonymity because of their fears that their wagers were illegal. But none are particularly upset. In fact, they were uniformly sympathetic with the organizer and his plight.

Even this year's winner, a veteran real estate financier who lost out on $300,000, said he was never angry over what played out, and gave the organizer credit for trying to fix the problem by tapping future Super Bowl contests for cash to repay those who should have taken money this year.

In the pool, winning the first or third quarters translates into a $50,000 windfall; winning at halftime means taking home $100,000; and capturing the top prize at the end of the game delivers $300,000.

In an e-mail sent to participants, the pool co-ordinator apologized for the disaster.

"I appreciate everyone's input and understanding given the unfortunate events leading to this and we will be making significant changes to the collection process going forward," he wrote.

The Globe has not been able to reach the organizer.

Fundamentally, the Bay Street pool is no different than the contests staged in basements and bars across North America. It is based on a table with 100 squares; across the top are numbers from zero to nine, representing the points scored by one team and down the side is another run of numbers from zero to nine, representing points put up by their opponent.

Each square, which is randomly assigned, represents a possible score, and prizes are awarded at the end of each quarter. There's a big prize for whoever has the correct square at the end of the game.

This year, the New England Patriots beat the Los Angeles Rams by a score of 13 to 3, so the winner had the square that corresponded to Patriots 3, Rams 3 on the chart.

Two things make the Bay Street pool different.

First, most Super Bowl squares see gamblers toss in $10 or $20 an entry, leading to prizes worth $1,000 to $2,000. In this version, buying one square costs $5,000 - and it must be paid in cash, preferably in $100 bills, according to participants.

To collect the cash, the co-ordinator goes from office to office with a backpack. He's often greeted with high-fives and cheers.

The Bay Street pool also has prestige. It's a word-of-mouth affair, and to enter you need to know someone with an inside track. These gatekeepers tend to spread the joy around by syndicating their entries, perhaps splitting a square with 10 of their friends or colleagues, so that each person pays $500.

One participant said he heard that the robbery took place in Mississauga; another said he heard that the thief trashed the house.

If the organizer was robbed, he apparently didn't go to the authorities. Police departments in Toronto and three surrounding regions said there were no reported residential robberies on this scale in the week leading up to the Super Bowl. Constable Ryan Anderson of the Halton Regional Police Service said: "Our officers have no record of a reported theft of $500,000, and I think we would remember that call."

The pool started out as a bet among friends and has grown over the years. No one seems sure whether the current form is fully legal.

The answer to that, according to lawyers Michael Lipton and Kevin Weber at Dickinson Wright LLP, who focus on the gambling field, likely depends on whether the organizer takes a cut. Under the Criminal Code, if he is merely holding the money for winners, and if the pool is based on a legal sport, it should not be a problem.

In his e-mail, the organizer said he "will not be taking any fees" this year or for the next four years as part of his plan to make up the lost funds. His repayment plan will take four years.

After each Super Bowl from now until 2023, there will be partial payouts for this year's prizes, with $12,500 to the first and third-quarter winners, $25,000 to the halftime winner and $50,000 to whoever has the final score correct.

To make the math work, the size of the final prize each year will be cut to $200,000 from $300,000.

"Good luck to all," he ends the e-mail, "and once again, thank you for your understanding throughout this difficult process!"


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Court places Mike Weir Wine in receivership
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The failed winery owes more than $6-million, including $2.2-million to its namesake
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By DAVID EBNER, ANDREW WILLIS
  
  

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Tuesday, February 5, 2019 – Page B2

Golfer Mike Weir and broadcaster Bob McCown, two of the bestknown names in Canadian sports, are in a court battle over Mike Weir Wine Inc., a failed winery.

Mr. McCown, who hosts the afternoon drive-time radio show Prime Time Sports in Toronto, owns the winery - and the winery owes Mr. Weir $2.2-million.

On Jan. 30, an Ontario Superior Court of Justice order from Justice Glenn Hainey put the winery into receivership under the oversight of BDO Canada Ltd. Mr. Weir had made the application for the order.

According to court documents, the winery also owes $4.3-million to Royal Bank of Canada.

Mr. McCown, 66, made forays into the wine business in 2013, when he bought Stoney Ridge Estate Winery in Vineland, Ont., one of the province's oldest wineries, and a 15-per-cent stake in Mike Weir Wine in Beamsville, Ont. He bought full control of Mike Weir Wine in 2017.

Mr. McCown, in a Globe and Mail profile in 2015, said he had brought brand savvy to Stoney Creek. (The broadcaster rarely drinks and has an allergy to red wine.) He said the wine business is "run by a bunch of farmers and wine growers who don't know [anything] about marketing.

They have no concept of how a business really runs."

He said Stoney Creek was having success at the LCBO.

"I thought if you bring a little level of sophistication to this thing, if I can use my contacts, maybe we can change it," Mr.McCown said in 2015. "In 18 months, boy, we've changed it and we're barely started."

Among Stoney Creek's products is a wine branded as "Doug Gilmour Bin 93" - named after the former Toronto Maple Leafs' captain. Mr. Gilmour's nickname was "Killer" and Stoney Ridge sells a "Killer Fanatic" two-pack, featuring bottles of red and white wine and an autographed hockey puck for $115. Stoney Ridge also sells vintages endorsed by the band the Tragically Hip such as the 2017 Ahead by a Century Chardonnay.

At Mike Weir Wine, the winery issued three promissory notes to Mr. Weir on Oct. 20, 2017, that it was to pay back a year later. But court documents allege the winery failed to repay what now amounts to about $2.2-million - some of which is secured against the winery and its physical assets.

Some of the debt was to be forgiven if the winery was sold by the time repayment was due on the notes and the secured notes were repaid in full.

The winery had been put up for sale in October, 2017, for $10.9million. Its retail outlet closed last spring. The sale price was dropped to $8.9-million and then cut again to $7.5-million.

After Mr. Weir made the application to put the winery into receivership - so that it could be sold ahead of the spring growing season - Mr. McCown requested a brief adjournment to allow for the negotiation and closing of a sale to a potential purchaser of the winery for more than $7-million, according to court documents.

Mr. McCown said the claim that the winery is in danger and needs a receiver to protect it "is incorrect."

A call to Mr. McCown late on Monday was not immediately returned. A call and e-mail to to Mr.Weir's lawyer were also not immediately returned.

With a report from The Canadian Press

Wednesday, February 06,2019

Correction

A Tuesday Report on Business article on the court battle over Mike Weir Wine Inc. incorrectly referred to Stoney Ridge Estate Winery as Stoney Creek in some subsequent references.


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Economical's IPO value: up to $1.9-billion
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Waterloo, Ont., insurer to hold March 20 meet to allow owners to vote on going public as part of demutualization
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Saturday, February 2, 2019 – Page B2

Following in the footsteps of Canada's largest insurers, 148-yearold Economical Mutual Insurance Co. is moving forward with an initial public offering that is expected to value the Waterloo, Ont.-based company at up to $1.9billion.

Economical announced plans late Thursday to hold a meeting on March 20 that would see its current owners - the company's policyholders - vote on going public as part of a process known as demutualization. Economical disclosed that it hired BMO Nesbitt Burns Inc. and RBC Dominion Securities Inc. to value the company and that the two investment banks estimated last May that it will have a market capitalization of $1.3-billion to $1.9-billion.

Economical is Canada's ninthlargest property and casualty (P&C) insurer, with a 4-per-cent market share, according to data compiled by the Insurance Bureau of Canada. Publicly traded Intact Financial Corp. is the country's largest P&C insurer, with 14 per cent of the market.

The P&C industry has been consolidating around its largest players over the past decade, with several foreign-owned insurers selling their Canadian operations to domestic companies, owing in large part to unpredictable profitability in auto insurance. In a letter sent Thursday to the company's policyholders, Economical chairman John Bovey said: "Becoming a public company will allow us to unlock our full potential and compete with the multinational companies operating in our market."

Life insurers such as Manulife Financial Corp. and Sun Life Financial Inc. went through a similar demutualization process almost 20 years ago, as did smaller rivals Canada Life Assurance Co.

and Waterloo-based Mutual Life Assurance Co., both of which were subsequently acquired. In Economical's letter to policyholders, Mr. Bovey pointed out that federal regulations prevent any takeover for two years after the IPO; after that date, any bid for the company would still need to be approved by the federal Minister of Finance.

"After demutualization, Economical will have access to additional capital to invest in its business," Mr. Bovey said. "In a rapidly changing industry and a market that is increasingly subject to disruption, this flexibility becomes increasingly important."

Going public is expected to translate into a windfall for Economical's current owners, worth between $300,000 and $430,000 for eligible mutual policyholders and anywhere from $1,500 to $2,300 for non-mutual policyholders, who have a different ownership stake. The two investment banks predict Economical's policyholders will receive 100 million shares, valued at between $13 and $19 each. The actual price of the stock will be set when the company determines the date for an IPO and will reflect the company's results and financial markets at that time.

If two-thirds of Economical's mutual policyholders approve the IPO plan in March, there will be one final vote by all policyholders before the company lists its shares on the Toronto Stock Exchange. Economical started down the road to demutalization in 2015, and the company's board of directors unanimously endorsed demutualization in a package sent to policyholders on Thursday. Over the past three years, the company has spent $20-million on the plan.

Economical does business under a number of brand names, including online division Sonnet Insurance, a Quebec unit known as Missisquoi Insurance Co., British Columba-based Family Insurance Co. and Petline Insurance, the country's oldest and largest insurer for dogs and cats.

The company has $5.6-billion in assets and posted a loss of $93million in 2017; it has yet to report 2018 results. It has done a number of acquisitions in recent years, including a 2016 purchase of Western Financial Insurance Co. and its flagship Petsecure brand from Desjardins Group.


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Telus, BCE need to prepare for a 5G future without Huawei
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Wednesday, January 30, 2019 – Page B1

You don't need a crystal ball to predict where the Canadian government is going to come down on who should build the country's 5G wireless networks. Or rather, who shouldn't.

It's all but a certainty that Ottawa will ban Huawei Technologies Co. Ltd from supplying equipment for the next generation of wireless, following the lead of the United States, Australia and New Zealand. How can the government do otherwise? In December, Canada's top spy, David Vigneault, director of the Canadian Security Intelligence Service, used his first public speech to warn of the potential for state-sponsored espionage on 5G networks. On Monday, U.S. acting attorney-general Matthew Whitaker alleged Huawei executives are "criminals and bad actors" as he brought charges of stealing trade secrets, money laundering, bank fraud and obstruction of justice against the company.

Against this backdrop, it's clear the Liberal government would be taking a political gamble if it allowed the 5G to happen in Canada with Huawei gear.

It's far less clear how Telus Corp. and BCE Inc., both currently significant customers of the Chinese company, will cope with life after Huawei.

Before Monday's revelation of U.S. criminal charges, Telus and BCE were aggressively lobbying federal regulators to keep Huawei as a supplier, warning that a ban on the company would translate into higher customer costs and a slower 5G rollout. In contrast, rival Rogers Communications Inc., never a big Huawei customer, has announced plans to rip out the Chinese company's equipment and run its 5G network on gear from Ericsson, which is based in Sweden.

Major European telecom companies are also starting to steer clear of Huawei as they prepare for a 5G future.

Telus, which made the largest investment in Huawei equipment, has been running a spirited campaign in favour of retaining ties. Earlier this month, Telus executive vice-president Eros Spadotto sent a memo to the company's 30,000 employees that reaffirmed the Vancouver-based company's commitment to its long-time supplier. Mr. Spadotto said: "Clearly, Huawei remains a viable and reliable participant in the Canadian telecommunications space."

What can Telus say now? "Yeah, the U.S.

government called them criminals and bad actors. But their equipment is good and cheap!" That won't fly.

BCE and Telus need to change the conversation. Rather than fighting for the right to include Huawei in their futures, the country's second- and third-largest wireless providers need to find the smoothest possible path to networks built with someone else's gear. Because no companies have more to gain from the transition to ultrafast telecom platforms than Telus and BCE.

The migration to 5G is taking place right now in markets such as the United States and South Korea and begins next year in Canada. The early beneficiaries will be businesses in data-heavy sectors such as health care, retail, education, transportation and education. Which telecom company has a major health-care business?

That would be Telus. Who is the market leader in supplying wireless services to domestic businesses? That's BCE.

"We believe it is increasingly difficult to refute the view that BCE and TELUS ... are best prepared for 5G," analyst Drew McReynolds at RBC Capital Markets said in a recent report. The potential marketplace is huge: U.S. tech company Qualcomm, which admittedly wants to sell new equipment, estimates the global 5G "value chain" will generate up to US$3.5trillion in revenue by 2035, and support as many as 22 million jobs.

Telus and BCE can exploit their firstmover advantage in 5G only if they are working with suppliers that can deliver the goods, and steer clear of political sanctions. Rather than lobbying federal regulators to preserve ties with Huawei, Telus and BCE should recognize the larger geopolitical forces at play - and quietly make the case for some government support as they retire existing equipment and migrate to new suppliers.

For the two telcos, there's nothing but downside if they choose to fight the tide, and the U.S. government, to preserve their relationship with Huawei. The two telecom companies would risk what RBC's Mr.

McReynolds called "a worst case scenario, where a rip and replace of 3G and 4G equipment would be required, a scenario that has little international precedent."

Ripping out existing Huawei gear could cost the Canadian telecom companies up to $2-billion, according to Mr. McReynolds' estimates. Shifting to new suppliers opens the door to multibillion-dollar opportunities. This shouldn't be a difficult decision for Telus and BCE.

Associated Graphic

Many telecom companies are trying to steer clear of gear produced by Huawei, employees of which are shown working at a Beijing store.

WANG ZHAO/AFP/GETTY IMAGES


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For SNC, Saudi writedown is the cost of Ottawa's public diplomacy
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Tuesday, January 29, 2019 – Page B1

For most Canadians, television footage of 18-year-old Saudi asylum seeker Rahaf Mohammed walking through Toronto's airport on the arm of Foreign Affairs Minister Chrystia Freeland was a feel-good moment.

For Neil Bruce, chief executive officer of SNC-Lavalin Group Inc., the political photo opportunity was a symbol of what has become a multibillion-dollar headache at the country's largest engineering firm. Montreal-based SNC now faces the prospect of a sweeping restructuring, partly because of decisions made in Ottawa. One of those decisions was to escalate a diplomatic row with Saudi Arabia, the home of 9,000 SNC employees.

SNC took a $1.24-billion writedown Monday on its oil and gas business, which accounts for approximately one-third of the company's revenue. The hit reflects a deteriorating relationship between the Canadian government and the royal family that runs the kingdom. SNC has been doing business in Saudi Arabia for 50 years; Saudi contracts accounted for 11 per cent of its $9.3-billion in annual sales in fiscal 2017, and the country has been an area of growth. But that's over.

The Saudi relationship took a beating last August, when Ms. Freeland tweeted her support for jailed dissidents. The Saudi regime hit back, suspending new trade and investment ties with Canada. Things have been frosty ever since. While Mr. Bruce tried to be diplomatic in his comments on Monday, he made it clear that SNC's prospects in the region grew bleaker this month when the Foreign Affairs Minister personally welcomed Ms. Mohammed, who has renounced Islam and denounced her country's oppressive treatment of women.

"I don't really want to comment on the ins and outs and the rights and wrongs of the relationship between the two countries," Mr. Bruce told analysts on a conference call.

"But the relationship, and certainly KSA [kingdom of Saudi Arabia] with regards to Canada, has not been helped by the recent position with regards to the asylum seeker. That, from a Saudi perspective, has not gone down very well at all," Mr. Bruce said.

Mr. Bruce said SNC is now considering selling or spinning out its Saudi operations to deal with the political uncertainty surrounding the business, a process that began last fall. And SNC brass also continues to deal with the fallout from a failed attempt to settle federal criminal charges of fraud and bribery, stemming from the company's operations in Libya under now-deceased leader Moammar Gadhafi. Again, the problem stems from a policy decision. Lawyers for the federal government and SNC struck a draft agreement that involved fines and specific undertakings by the company - a blueprint that works in British and U.S. markets - only to see the settlement shot down by federal director of public prosecutions Kathleen Roussel.

This series of setbacks has sparked speculation that SNC is a takeover target.

While no offers have emerged, Quebec Premier François Legault is taking the company's problems seriously, floating the prospect of the provincial government's investment agency getting involved to protect SNC from a foreign takeover.

SNC's experience is an extreme example of the uncertainties that government policies are creating for Canadian companies looking outside the border for growth. Privately, many Canadian CEOs are worried about the growing cost of the Trudeau government's geopolitical strategy. It's increasingly difficult to do business in China in the wake of the legal circus surrounding the government's decision to detain Huawei chief financial officer Meng Wanzhou, who faces extradition to the United States. Even the new North American trade agreement, seen by some as a success for Ms. Freeland, might have worked out better if the government had not aligned Canada's fortunes so closely to Mexico's early in the negotiations, some corporate leaders believe.

The Liberals have consistently promised progressive social policies alongside a business-friendly agenda that benefits the middle class. Only half that promise is being kept. SNC's market capitalization fell by 27 per cent on Monday, or $2.4-billion.

Real wealth is being destroyed and real jobs are being put at risk. Perhaps a focus on behind-the-scenes negotiations, rather than photo ops, would better serve Liberal ambitions on international trade.

Associated Graphic

SNC-Lavalin president and chief executive Neil Bruce, seen in Montreal last May, says the company is mulling a sale or spinning out of its operations in Saudi Arabia in a bid to deal with the political uncertainty over the business.

GRAHAM HUGHES/THE CANADIAN PRESS


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Hydro One scraps planned $4.4-billion takeover of Avista
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Utility to pay $103-million breakup fee after perceived interference from Ontario's PC government
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Thursday, January 24, 2019 – Page B1

Hydro One Ltd. formally called off its planned $4.4-billion takeover of Avista Corp. on Wednesday and will pay the U.S.

utility a US$103-million termination fee for a deal that failed due to perceived political interference from Ontario's Progressive Conservative government.

The decision to kill the takeover ends a U.S. expansion strategy championed by former Hydro One chief executive Mayo Schmidt, who struck an agreement to buy Spokane, Wash.-based Avista in the summer of 2017. The takeover required approval from regulators in states such as Washington and Idaho, where Avista runs electricity and natural gas transmission networks. As part of the transaction, Hydro One agreed to pay Avista a predetermined fee if the deal did not close by March, 2019, to cover legal and investment banking expenses and the opportunity costs that come with a failed transaction.

The two companies, which together would have had two million customers and ranked among the 20 largest North American utilities, said Wednesday that they "mutually agreed" to call off their merger. Paul Dobson, acting president and CEO of Hydro One, said in a news release: "Hydro One's Board, management and employees remain focused on delivering safe and reliable power, providing exceptional customer service and driving shareholder value."

Hydro One is 47-per-cent owned by the government of Ontario after being partly privatized in 2015. In Ontario's provincial election last year, Progressive Conservative Leader Doug Ford made rising power prices and Mr. Schmidt's $6-million in annual compensation part of his campaign, promising to fire the Hydro One CEO and bring down power prices by 12 per cent if elected.

In October, after Mr. Ford was elected Premier, Mr. Schmidt departed and the entire Hydro One board resigned.

Two state regulators subsequently turned down Hydro One's takeover bid. In explaining its decision in December, the Washington Utilities and Transportation Commission said: "Provincial government interference in Hydro One's affairs, the risk of which has been shown by events to be significant, could result in direct or indirect harm to Avista if it were acquired by Hydro One."

In January, the Idaho Public Utilities Commission said: "It is abundantly clear that the province does not have to own 51 per cent of Hydro One in order to effectively control the company.

Based on the recent events surrounding the province's intrusions into Hydro One corporate affairs, any other conclusion would be unreasonable and ignorant in light of the uncontested facts and evidence." Ontario Energy Minister Greg Rickford noted in a statement on Wednesday that Hydro One, under Mr. Schmidt, agreed to pay the US$103-million termination fee and said any costs incurred by the deal's cancellation "will not be paid by Ontario electricity customers." He added the failure of the deal "doesn't change our focus on bringing down hydro rates by 12 per cent."

In the wake of the U.S. regulators' announcements, Mr. Ford had defended his government's decision to intervene in Hydro One's governance and the Avista takeover. In December, Mr. Ford said: "This is a deal that was put together by the former board and former CEO of Hydro One - a deal that did nothing to lower hydro rates for Ontario residents."

Hydro One earned a profit of $194-million on revenues of $1.6billion in the most recent quarter, the three months that ended Sept. 30, which means the US$103-million termination fee to Avista will amount to approximately 70 per cent of the Canadian utility's quarterly income.

Hydro One also announced on Wednesday that it will redeem $1.54-billion of debentures issued in 2017 to fund the Avista acquisition.

Hydro One is currently searching for a new CEO, with the provincial government and company sending different messages on what the next boss could earn.

Hydro One chair Tom Woods, who was appointed by the provincial government, said in testimony last fall to U.S. regulators that the next CEO could earn up to $4-million.


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Stronach's court fight threatens to put his legacy on the ropes
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Wednesday, January 23, 2019 – Page B1

Like a boxer who has stepped into the ring too many times, entrepreneur Frank Stronach is seeing his business reputation take a pounding in an increasingly nasty courtroom battle with his daughter and her allies for control of the family's fortune.

At 86, Mr. Stronach should be basking in the glow of his Business Hall of Fame achievements as founder of Magna International Inc., now one of the world's largest auto-parts companies. The Austrian native's failed side ventures - remember Frank's Energy Drink, with the ad campaign in 2006 that featured lederhosenclad women and the slogan "keeps you yodelling all night long"? - would be amusing footnotes to a storied career.

Instead, Mr. Stronach launched a court fight last October against daughter Belinda Stronach, two of his grandchildren and Alon Ossip, former chief executive of The Stronach Group, that is likely to define his legacy around projects that failed, rather than as the story of a penniless immigrant who turned the tool-and-die operation in his garage into a $21-billion global business.

Mr. Stronach has been launching one new venture after another since the 1980s. A handful made significant money; in particular, the industrialist has shown a deft touch in real estate. Others came and went without leaving a significant dent in a family fortune that amounted to $1.6-billion in 2011, when Mr. Stronach cut ties with Magna and sold his stock in the company. Along with the energy drink, there was a tennis equipment company, a soccer league, a lifestyle magazine and a restaurant.

These businesses were sideshows. Mr. Stronach's public image was defined by his role as founder of Magna, an industrial company known for innovation.

Now, credit for Magna's success may shift to current CEO Donald Walker, who joined the company in 1987 and has been CEO, or shared the top job, since 2005.

Instead, Mr. Stronach's legacy is likely to be determined by a family fight over a series of unprofitable ventures, most of which he launched after leaving Magna.

When he asked the Ontario courts to hand back control of the family businesses, something he relinquished to his daughter to run for office in Austria, Mr. Stronach opened the door to public scrutiny of his business acumen. Outside of auto parts and real estate, it's not a pretty picture.

Legal documents filed in an Ontario court by Ms. Stronach, her two adult children and Mr. Ossip portray Mr. Stronach as an entrepreneur who got lucky once, then lost his touch and refuses to admit it.

In defending their actions and trying to keep control of the family company in Ms.

Stronach's hands, they detail the patriarch's estimated $800-million of losses on a variety of businesses in recent years, including cattle ranches, golf courses and electric bikes.

"Frank's declining mental state and lack of judgment became increasingly evident and challenging for those charged with running a profitable business," Mr.

Ossip said in a court document.

He added: "Frank's behaviour represented a departure from his prior philosophy of acknowledging when commercial ventures were failures and 'amputating' them accordingly."

In what has become a public airing of a private family affair, Mr. Ossip said in a court filing: "Belinda increasingly became the 'brand' of The Stronach Group, which appeared to inspire feelings of resentment in Frank."

In another legal filing, from family-owned Stronach Consulting Corp., Ms. Stronach and her allies outline the scope of the Magna founder's future spending plans.

In addition to a grass-fed beef operation that has consumed an estimated US$324million, Mr. Stronach had plans for dairy operations, chickens and pigs, fish farms and a pet-food facility. He is alleged to have planned to launch theme parks near a Stronach-owned racetrack in the Miami suburbs, and in his native Austria.

"Frank knew that Alon and Belinda were loath to openly embarrass him, as he was Belinda's father and an important part of The Stronach Group brands," Mr.

Ossip said in court filings. "In deference to Frank's prior reputation and accomplishments, therefore, Alon and Belinda did their utmost to allow sufficient time for Frank's existing projects to prove themselves before making a decision to terminate them."

There's no longer much deference being shown by Mr. Stronach's daughter and his former trusted adviser.

The gloves are now off, with an Ontario judge expected to decide who controls the family businesses going forward. In this slugfest, Frank Stronach's hard-won reputation as a business visionary is already taking serious hits.

Associated Graphic

A statue of Pegasus, the mythic winged horse, defeating a dragon rests in Gulfstream Park in Hallandale Beach, Fla. Magna International founder Frank Stronach paid for the statue.

TYPHOONSKI


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