Onex, CPPIB Unite in Bid to Buy U.K. Firm

Via Pension Pulse.

Tara
Perkins of the Globe & Mail reports, Onex, CPPIB
unite in bid to buy U.K. firm:

Onex Corp. and the Canada Pension Plan Investment
Board are joining forces on the proposed takeover of a major British
manufacturing and engineering company, just as the U.K. begins its own
“hollowing-out” debate.

Toronto-based
Onex and the CPPIB have not launched a formal bid but have proposed a
deal, worth more than $4-billion, for Tomkins PLC.
Due diligence on the company is now “at an advanced stage,” Tomkins
said in a statement Monday.

The proposed takeover comes as North
American suitors take advantage of a sluggish British pound to target
U.K. companies. Earlier this month, for example, the Ontario Teachers’
Pension Plan closed its £389-million ($625-million) acquisition of
Camelot Group Ltd., which operates the U.K. national lottery.

Coupled
with the lingering effects of the global recession, fears are mounting
that a number of British companies will be scooped up by foreigners.

While
the concern has not hit the level witnessed in Canada in 2006 and
2007, when the Canadian business community was consumed by the
“hollowing-out” debate, it’s unusual for the British to be bothered
about this issue.

The tables have
turned and Canada now finds itself portrayed as one of the prowling
foreigners. But it’s the country’s pension plans and private equity
players, not publicly listed corporations, that are on the hunt.

“In
Canada, our corporate profits have rebounded fairly strongly and our
credit markets are still flowing,” said Toronto-Dominion Bank economist
Francis Fong. “And of course the dollar is providing a pretty
significant boost.”

While the pound
has depreciated and the Canadian dollar has surged since 2007, “it’s more about
the ability of firms to find funding,” he said.

It was
Chicago-based Kraft Foods Inc.’s $20-billion purchase of Cadbury, which
closed in January, that first ignited concerns in Britain, which has
traditionally been secure in its business prowess and hasn’t been
worried by takeovers.

An independent takeover panel is in the
midst of a review of the relevant laws, which Business Secretary Vince
Cable has suggested are too loose, and the new government is looking at
the issue. “I want to throw some sand in the takeover process,” the
Daily Mail quoted Mr. Cable as saying this month. But, he added: “We
don’t want to put up a sign that says: ‘Britain is not open to
business.’?”

There is discussion about
whether a greater proportion of the shareholders of a target company
should be required to approve a deal, or whether higher merger fees
should be used to curb the flow of deals. Those pushing for a new regime
of takeover laws are already dubbing them the “Cadbury Law.”

“Foreign
firms swooped on two British energy and industrial giants with
takeover bids worth £9.3-billion today, raising fears that another
swath of British assets will fall into the hands of overseas owners,”
the Evening Standard said Monday. In addition to the bid for Tomkins,
International Power said talks have resumed about a reverse takeover by
France’s GDF-Suez.

Just as a weak currency shouldered much blame
in Canada’s hollowing-out debate – which raged after the takeovers of a
series of blue-chip firms such as Alcan, Falconbridge, Inco and
Dofasco – the weak British pound is being pointed to in the U.K.

The
financial crisis took its toll on Canada’s pension and private equity
players, but the pain they felt is overshadowed by that of many major
financial players and corporations in other countries. The International
Monetary Fund is projecting worldwide economic growth of 4.5 per cent
this year, with Canada’s pegged at 3.6 per cent while the U.K. economy
is expected to grow by 1.2 per cent.

Canadian
pension funds are gaining new clout internationally because of their
size, sophistication, and ability to partner up and work together,
Charles Baillie, the former CEO of TD Bank who is now chairman of Alberta
Investment Management Corp., said in an interview last week. “You’ll
see much more international exposure because of the ability to band
together and make meaningful bids.”

This time around, CPPIB has
joined forces with Onex, which has a history with auto parts companies,
such as the acquisition of the beleaguered Automotive Industries
Holding Inc. Onex turned it around and sold it at a profit to Lear
Corp. Tomkins’ businesses stretch from auto parts to bathtubs.

Tomkins
also said Monday that its sales improved during the first half of
2010, but it’s unlikely that it will be able to keep up the momentum in
the second half of the year due to “global economic uncertainty
coupled with recent downwards trends in some macro indicators.”

The
company’s CEO, James Nicol, 56, is highly respected in Canada. He left
his job as president and chief operating officer of Magna
International Inc. and joined Tomkins in 2002. Tomkins’ finance
director, John Zimmerman, 46, worked in Toronto for Braxton Associates
in the early 1990s. Both men sit on Tomkins’ board.

Interestingly,
Philip Inman of the Guardian reports, Canadian
pension funds move in as UK counterparts sell up:

As
domestic pension funds sell their stakes in British companies, their
place is increasingly taken by pension funds from Canada.

The $127bn (£84bn) Canada Pension Plan
Investment Board, which is bidding for Tomkins, already owns stakes in
about 35 companies including chemist Alliance Boots, US retailer Dollar
General, internet phone operator Skype and US phone-equipment maker
Avaya.

The pension fund manager, stung
by a near 20% loss in 2009, has made offers for a string of companies
hit by the financial crash and directs 25% of its holdings into private
equity deals – more than any UK pension fund.

In the past year
it bid $5bn alongside TPG, one of the most aggressive US private equity
firms, for IMS Health of Connecticut.

Buying
Tomkins, which is described by several analysts as a bargain, would
add to a growing list of major stakes in large corporations by Canadian
pension funds.

The Ontario Teachers Pension Plan holds a 27%
stake in Northumbrian Water and was rumoured earlier this year to be
supportive of a full takeover. The latest speculation allies the
Ontario fund with the Abu Dhabi Investment Authority to take the
utility private.

In March the Ontario
fund spent £389m buying the lottery operator Camelot after it beat
private equity firm CVC in an auction.

The Canada Pension Plan is
the equivalent of the UK's state second pension, formerly

known as
Serps, with one key difference. In the UK, national insurance
contributions are used to pay current pensioners and the remainder is
diverted into general government spending. The Canadians take the
remainder and invest it.

The pension plan's investment board is a
separate unit with a constitution that allows a wide range of holdings.

A
focus on large, longer term purchases dates back to the 1990s when the
fund decided its size warranted diversifying into lucrative private
equity-style deals. Returns between 2004 and 2007 averaged more than
10%.

Some UK funds have attempted to
mimic the success of the Canadian funds with increased support for
private equity and hedge funds.

The University Superannuation
Scheme, which provides an occupational retirement income for academics,
has boosted so-called alternative investments to close an £8bn
deficit.

But the culture of UK funds
and many of the rules surrounding scheme funding have discouraged direct
investment in companies. Until a few years ago most occupational
schemes were more the 70% invested in equities with the remainder in
cash, property and bonds.

The steep stock market decline of 2003
and accounting rules changes encouraged fund trustees to cut the risk of
falls in value with a shift from shares to fixed income bonds.

Critics
of UK funds argued the move, while it minimised the impact of
declining stock markets and avoided the steep falls that hurt the
Canadian funds, effectively locks them into low growth investments and
prevents them from making strong gains in the future.

It's true that UK funds have adopted a
liability-driven investment approach, moving more towards fixed income
and allocating less to public shares. Some UK funds have shifted more
assets into alternatives, but most funds have cut risk across the board.

So
what's the right thing to do? It depends. The Canada Pension Plan (CPP)
is a partially funded plan and the CPP Fund (CPPIB) is in an enviable
position because contributions are expected to exceed annual benefits
paid through to 2021 and there is no need to
use current income to pay benefits for another 11 years.

Moreover,
despite the setback in 2008, CPP assets have grown over the last ten
years, a point made by Jean-Claude Ménard, Canada's Chief Actuary in
his testimony at the House of Commons Standing Committee on Finance
last April:

The average pension fund return
for OECD countries was negative 19% (nominal) for the first ten months
of 2008. The CPP Fund declined by $13.8 billion over the final nine
months of 2008. Still, the CPP assets of $111 billion represent four
times the annual benefits paid. In comparison, ten years ago, the assets
represented less than two times the annual benefits paid.

In this
environment, it is important to reconfirm that the structure and design
of the first two pillars of Canada’s retirement income system is unique
and will allow the OAS Program and CPP to fare better than many of
their private pension counterparts. In addition, steady-state funding,
which is the partial funding approach employed by the CPP, remains the
optimal funding approach for the CPP.

Although the financial
markets are currently quite volatile and the value of CPP assets will
fluctuate over the short-term, it is the ongoing contributions made by
working Canadians in addition to long-term investment performance that
will determine the Plan’s ability to meet its commitments to plan
members.

As I've stated it before, a handful of funds like CPPIB, are able to
take on more liquidity risk than more mature pension plans that are
managing assets and liabilities more closely. Those funds are not able
to tie up a big portion of their assets in private markets because they
need the liquidity to pay out benefits.

And what can go horribly wrong
for CPPIB? One word: Deflation. If a protracted period of debt deflation
engulfs the developed world, then CPPIB will be sitting on a ton of
public and private equities that will be losing value.

Who
will be in a better position if a long deflationary era awaits us? Funds
that allocated to high quality fixed income assets, because the only
thing that will protect your downside if deflation develops is long-term
government bonds.

Are CPPIB and other Canadian pension funds
going on an
overseas buying spree doing the right thing? I think so. Given the
strong Canadian dollar, and the expertise to co-invest in private
markets, they should be putting some of the long-term capital to good
use. Let's just hope that deflation doesn't rear its ugly head.

Comments

[ZackAttack]

Making the same mistake Cerberus did - buying a deep cyclical  (auto/airplane parts, building materials) company that is dependent on cheap capital at a time when there's massive overcapacity in the world.   

The rules have changed and they don't understand it yet because they're still navigating by the old instruments.

I maintain, a pension fund this size has absolutely no business buying anything that can't be sold with a mouse click.

[Leo Kolivakis]

***Feedback***

A senior pension officer sent me this comment:

If you compare CPPIB's performance to bond returns since its inception, the bonds did better. The creation of CPPIB and taking on equity risk has not, as yet, provided Canadians any benefit. No one seems to want to acknowledge this. Private or public equity is a moot point, and it appears privates underperformed publics, although it is hard to get this data from their reports, but it is certainly the case on an IRR basis. Allowing these failed non-taxed pools to crowd out strategic industrial (taxable) buyers of important assets is bad public policy and anti-capitalist. Onex and others are also largely representing non-taxable investors. At one time PE arbed the tax advantage to its investors benefit, now it just overpays and the sellers get the benefit. This is all unsustainable.

These are legitimate points, however, CPPIB will argue that over the long-run, taking on public and private equity risk will yield substantial gains. As I've argued, that all depends on the environment we're heading into and right now, we simply do not know if deflation, inflation or something in between will prevail. Also, keep in mind what the Chief Actuary of Canada said about the assets now representing four times the benefits, as opposed to ten years ago when they just represented two times the benefits.

[Grand Supercycle]

XAUUSD / XAUEUR / XAUAUD bearish warnings issued since July 1 continue . . .

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