By Adam Corelli
(First Published in The Independent, London, February 1993)
TORONTO, Ont.: TO AN OUTSIDER, the scene would have seemed unreal. It was a board meeting several months ago of a company within Edper, one of the largest corporations in Canada and the world.
Into the room sauntered the chairman and controlling shareholder, Peter Bronfman — a nephew of Sam Bronfinan, the one-time boot-legger who built Seagram into a global drinks conglomerate. Peter, a self-made tycoon in his own right, did not look the part, his casual dress and running shoes reflecting, perhaps, a lack of interest in the affairs of the moment. The meeting began.
The chairman neither asked nor answered questions. That task fell instead to a sharp-featured man sitting in a darkened comer, an accountant named Jack Cockwell who barked questions and statements from the gloom and was clearly the guiding force of the proceedings. It struck one of those present as an apt and eerie reflection of Edper itself, where the real power lurks in the shadows. “Peter seemed to be alert, but he didn’t seem to know what was going on,” said the boardroom witness.
Months later, Mr Bronfman, now 63, seemed to have regained his interest. He was spending time with friends but was preoccupied, fretting about his company, fretting about Mr Cockwell. According to Mr Bronfinan’s acquaintances he was concerned above all that he was making a lot of people like Mr Cockwell rich, while his own wealth – he and his brother Edward were once dollar billionaires – had practically disappeared, on paper at least. Belatedly, the chairman was beginning to realise that he was on the brink of disaster.
Edper, the Bronfmans’ holding company for their vast interests in North America, is in deep trouble from loan losses created by the melt-down in the Canadian commercial property market. Since 1989 the value of Edper-related stocks has fallen by between a half and 98 per cent, and the slide has accelerated in the last few weeks. A recent signal of its distress was the attempt to sell off one of its largest subsidiaries, Royal Trust, which is Canada’s second biggest trust bank.
Edper is little known in Britain only because – unlike Canada’s other big property empire, Olympia & York, owned by the Reichmann brothers – it has no major investments here.
It directly or indirectly controls assets worth maybe C$100bn (f.57.5bn), and at its peak it was three times the value achieved by O&Y. On its own, Edper makes up about 5 per cent of the total market value of the Toronto Stock Exchange.
All told, the companies of Edper Enterprises now employ more than 110,000 Canadians. The Bronfman empire controls a panoply of Canada’s once finest blue-chip companies, including Trizec (North America’s largest publicly-traded developer), Royal Trust, Royal LePage (Canada’s largest real-estate brokerage), John Labatt (Canada’s second largest brewer), Noranda (a C$10bn natural resources giant), Noranda Forest and MacMillan Bloedel (leaders in paper products), and London Life (Canada’s largest insurer). Edper also controls hundreds of other companies.
But it has an Achilles heel. Its debts are estimated by analysts to be anywhere between C$30bn and C$50bn (compared with C$22bn at O&Y). If it goes under it will send shock waves through the Canadian and US financial system that will make the demise of O&Y seem small by comparison, and it would devastate the profits of several leading international banks which have lent millions to the group.
This is a story of dynastic ambition within one of Canada’s wealthiest and most powerful families. Edper was built from a base of C$100m by Peter and Edward Bronfman – the “poor cousins” to Charles Bronfman of Montreal and Edgar Bronfman of New York, czars of the Seagram liquor empire.
Three decades ago Peter and Edward were the unlikeliest of candidates for ownership of such a huge corporation. They bore the surname which in Canada is enveloped in the aura of the super-rich. For decades the name Bronfman has been synonymous with invincible wealth, and long before Canadians had heard of the Reichmanns they had heard of the Bronfmans — yet it once seemed certain the two poor cousins would not share in that glory.
Peter and Edward began their working lives as outcasts from the family empire. The pair had spent their youth sequestered at American prep schools while their father, Allan, remained at home in Montreal.
His brother Sam was the domineering hardballer who had built Seagram from its Depression-era bootlegging roots into the world’s largest distiller. Seagram, which is now 38 per cent owned by Charles and Edgar Bronfman, sells its range of famous brands including Crown Royal, Chivas Regal, Mumms and Martell in some 150 countries worldwide.
Yet in the early years the Seagram success hung over the family like a curse. Sam Bronfman was the presiding genius. A short, fat man with thinning hair, he had a bellicose personality and a raging temper. During business meetings he would sometimes erupt into language that would make a longshoreman proud.
During the 1960s, his tyranny extended to trying to get Peter – by then a well-known businessman – to stop using the Bronfinan name. In 1952 Sam shut out his brother’s side of the family from Seagram. He made it clear to Allan that his sons, Peter and Edward, would have no future there.
In such a poisoned atmosphere, the poor cousins were forced to walk on egg shells at extended family gatherings. A few years later Sam obliged Peter and Edward to sell half their Seagram shares at below market prices — shares that he needed to keep control of the company. The sons only agreed in order to preserve their father’s job at Seagram.
A severance from their Seagram roots might have led Peter and Edward into a leisurely life of low-risk investing with their C$100m nest egg. Peter, after all, is a quiet, almost timid man with a deceptively passive air.
He is slim and now balding, and hates to wear formal clothes. He has been quoted as saying that he does not like to wear ties because they cut off the blood to the brain. On the face of it, he is not obvious tycoon material, more the kind who might have faded into the background.
But that is not what happened. In the early 1960s Peter and Edward were young, and their expulsion from the family business left them yearning for success of their own. With a chip on the shoulder and C$100m in their pockets, they set out to leave their own imprint.
The Bronfmans, like the Reichmanns, bet heavily on real estate and natural resources at the tail of the 1980s boom, shortly before the economy was hit with a painful burst of commodity deflation and a meltdown in commercial real estate. Already, the calamity has hit countless investors from Canada and abroad who have watched the market value of their equity investments in Edper-controlled companies collapse in just a few years. But this is not entirely the fault of the Bronfman brothers, for the story is more complicated than that, and things are often not as they appear. What frustrates Peter Bronfman most is the complexity of it all. He may control C$100bn in assets on paper; but his grip on the company’s day-to-day activities seems to be slipping. And the reason seems to be Jack Cockwell.
For Mr Cockwell built Edper. He was hired by the Bronfmans in the 1960s; at the time he was a 27-year-old accountant with Touche Ross in Montreal. He had moved to Canada in 1966 from South Africa.
It is hard to find people who like Mr Cockwell. He is an intense, compact and wiry little man, with steely eyes and a contempt for the “provincial” approach to business in Canada. He was educated at a British-style boys’ school in South Africa. Although he is described as many things by his contemporaries, they all agree on at least one thing: he has an insatiable appetite for grueling work and he seems to be a master of labyrinthine accounting.
Mr Cockwell’s driven work ethic and, brilliance with finance is acknowledged even by his enemies. It is often said that Mr Cockwell is Edper, that he makes all decisions, that he contemplates a strategy so complex and forward-looking that few others can understand it.
Mr Cockwell also brought a knowledge of the pyramidal control mechanisms used by South African conglomerates, and thereby the formula for Edper’s magical success. Securities and tax laws preclude such structures in many countries, but not in Canada. The limitations of Canada’s federal and provincial disclosure requirements, combined with a timid taxation structure, enabled Cockwell to build Edper.
The result is an empire which is tied together, in a Gordian knot of inter-corporate control mechanisms. When you cut through its maze of 32 public companies, hundreds of private companies and various holding companies, it is an empire which is essentially focused on real estate, natural resources, financial services and consumer products. And the only person who fully understands it all, it seems, is Jack Cockwell.
In a nutshell, Edper aims to control companies, not own them. The process is remarkably simple but amazingly effective at enabling the Bronfman empire to raise billions for the corporations at the bottom of the pyramid without having to use much of its own money.
What is remarkable is that Bronfman remained in control down the corporate chain despite the minimal cash used at the top, thanks to cascading, leveraged equity.
The process worked along these lines: Hees International, the group’s Toronto-based merchant banker, would handle the issue of C$100m worth of shares in an Edper company, half of which would be bought by Edper and the other half sold to the public. Hees would then take the $100m proceeds and invest it in a $200m share issue of a subsidiary of the first company, with the public again picking up half. That process, repeated five times, turns C$50m into C$1.2bn. and yet Edper puts up only 3.125 per cent of it.
So while Edper maintains control of its subsidiaries, its effective equity interest in those at the bottom of the pyramid is small. According to the 1991 Hees annual report, Edper’s equity interest in a range of large subsidiaries does not exceed 13 per cent.
This is how Bronfman-connected companies issued more securities than anyone else in Canada during the Eighties boom. They raised more than C$30bn in equity. This results in the labyrinth of private holding companies and interwoven public companies that make up the Hees-Edper corporate chart. The multi-tentacled corporate tree takes several pages to chart: no wonder they say Mr Cockwell is brilliant; no wonder Mr Bronfman is said to be confused.
In Mr Cockwell’s elaborate corporate architecture, all this equity enabled the group to raise vast amounts of debt. Companies within the Edper group raised capital using their assets as collateral. But many of their assets are “soft” — nothing more than the equity of other Edper companies. Since these instruments are already secured on Edper’s “hard” assets (such as property), the hard assets are often leveraged by equity more than once. This makes it difficult to judge the true debt-equity composition of the empire, and therefore its true financial health.
No wonder investors are spooked by the Bronfman empire. Stephen Jarislowsky, a manager of $15bn in pension funds for Jarislowsky Fraser of Montreal, said: “I stay away. I feel I don’t know what’s going to happen next in any of the companies, who will be favoured and what the machinations are. I find it very difficult to understand the statements: what they are doing or going to do next.”
A growing number of investors have become equally wary. They have been dumping Bronfman-connected stocks, resulting in huge losses. The total market value of various Edper group stocks has dropped by more than $21bn since their 1989 highs (which also suggests that the market value of the investments Edper companies have made in each other has dropped dramatically).
Yet the carnage does not end there. Scores of Edper-connected debt issues have also taken a bath on bond markets. Worse, the meltdown in commercial real estate has left the Bronfmans and their bankers tremendously-weakened.
“The commercial real estate sector within the Hees-Edper group nevertheless remains one of the fundamental building blocks, one of the fundamental pillars of the group,” said Alain Tuchmaier, a financial services analyst at McLean McCarthy of Toronto. “Clearly, given the outlook for commercial real estate, we are facing a long-term problem here. And those problems have spilled into the financial services side of the group through Royal Trust.”
It is not possible to determine how much debt has been piled on to Edper’s leveraged equity. As was once the case with O&Y, not even Edper’s bankers know how much debt is tied to the empire.
All they can be certain of is that the group’s net asset value is substantially less than the $100bn that Edper is able to claim officially thanks to some complex double accounting.
So how much debt is piled on to Edper’s overly leveraged equity? No one will say publicly. One source recently said that Canada’s banks and its federal government, worried about the ramifications of an Edper collapse, only learned the true figures three months ago. “The bankers fell out of their chairs in shock,” the source said.
The banks, Edper’s main lenders, are alarmed because a holding company of public companies is only worth as much as the equity of the public companies it owns.
“As a bank, if you have made a loan to a holding company, what collateral do you really have?” asks Tuchmaier. “A classic holding company has no real assets of its own. So the banks are changing their credit policies vis-a-vis the holding companies.”
This explains, perhaps, why controlling appearances has been as important to Mr Cockwell as controlling companies. Incredible as it seems, Edper companies have raised billions of dollars from investors without having to provide basic information on the group’s composition.
“I’ve always said the problem in understanding this group is not one of complexity but one of disclosure,” Mr Tuchmaier said. “Our securities laws, in terms of disclosure, are not that tight. Why do you think some companies go to great lengths to avoid filing US disclosure documents?”
Because of Canada’s poor disclosure requirements, obtaining the figures means asking Edper itself. But the group clearly resents being asked.
“Their response to questions they don’t like is to try to turn it around and ask questions about the motive of the reporter,” said Kimberley Noble, an award-winning business journalist for the Toronto Globe and Mail. “It is an unusual response to see in a company of this size.”
The very structure of the empire is stacked against the shareholders of the operating companies. The reason is that no matter how efficiently Edper runs things, the dividends shrink as they ripple up the corporate chain.
“A C$100m dividend at MacMillan Bloedel will leave barely enough to buy coffee by the time it ripples up to Edper,” says a former Edper insider.
Yet those dividends have been vital for the empire to pay for the obligations created by its various equity and debt issues. No wonder the Bronfman companies were big on dividend payouts. While earnings have not been that healthy, the dividends have been.
According to calculations by Mr Tuchmaier, companies in the Edper-Hees universe have paid out more than C$7.25bn in dividends on preferred and common shares since 1987, on operating earnings of just over $10bn.
The payout ratio, at more than 70 per cent, is unusually large. The average payout ratio for common and preferreds of the top 35 companies on the Toronto Stock Exchange, excluding the Hees-Edper companies, was just over 50 per cent during the same period. Some Bronfman companies have paid out more in dividends than they registered in earnings.
Yet the empire is still raising lots of cash. It has raised more than C$9bn in the last 20 months through share issues, asset sales and debt financings.
Lately, most activity is coming from asset sales. Various subsidiaries have sold C$2bn of assets. Several billion more in sales is expected in the next few months. But while such sales raise cash, they diminish the asset base supporting the leveraged equity.
Ironically, shareholders are not the only losers. Mr. Cockwell’s staff are not highly paid, and the collapse in share prices has made it difficult for them to leave their jobs. In return for hard work and long hours, the companies have granted them more than C$550m in loans to buy Edper group stocks.
Mr Cockwell and the managers have virtually assured their ability to wrest control of the empire away from Peter Bronfman, however, through the use of structured partnerships which split ownership and enable cash to move around. So the huge loans they have outstanding to the various companies may soon be owed to companies they control themselves.
Incredibly, Mr Cockwell seems to have all but finalised what could become history’s largest takeover without anyone -including Peter Bronfman – noticing. So why delay?
According to one Edper insider, the answer is simple: “He is in a position now to squeeze Peter out, so why do it?”
Edper Holdings is the key. It owns 74 per cent of Edper Enterprises, the main public company within the entire group. It went public in 1989 to provide an orderly method for Edward to begin selling his shares: he wanted out of the empire. But Peter wanted to remain in control.
Now Edper Investments, which is Peter, holds 50.1 per cent of Edper Holdings. The Pagurian Corporation holds the other 49.9 per cent of Edper Holdings. Pagurian is controlled by Mr Cockwell and the senior managers within the group — including many of those with the outstanding loans.
This holding is likely to increase because Peter Bronfman must cover the shortfall in any dividend payments from Edper subsidiaries to Pagurian. As the dividend flow dries up, Mr Bronfman will find that obligation increasingly hard to meet. For some reason Peter Bronfrnan agreed to partnership arrangements just before the recession hit, and these are likely to cost him control of the company.
“Peter’s not that swift,” says a disgruntled Edper insider. “He may see it. He may not. But if you trust Jack Cockwell, and he is your employee and your agent, then you control everything because he acts for you — until one day, when he says, ‘Sorry Peter, I don’t think I can do as you request’.”
There are those who suggest that if Mr Cockwell does take control, he will be taking over a ship caught in a financial hurricane. But if it sinks, he could be one of the lucky ones. It will be the international banking system and the Canadian government which are left with the wreckage. And that could prove one of the costliest salvage operations in history.