The Bronfmans Start Bailing

In the tightly knit world of Canadian business, no families have been more dominant than two sets of brothers: Toronto's Bronfmans and Reichmanns. Peter and Edward Bronfman, scions of one of Canada's most powerful dynasties, built their empire over two decades into the largest in corporate Canada. Like Paul, Albert, and Ralph Reichmann, the Bronfmans operated in great secrecy, assembling vast holdings in real estate, natural resources, and finance. During the 1980s, the two family empires grew to touch nearly every sector of Canada's economy. Now, the real estate collapse that brought down the Reichmanns' Olympia & York Developments Ltd. is taking its toll on the Bronfmans, whose empire seems to be crumbling around them.

Comparisons with the fall of the Reichmanns are just "undue speculations," insists J. Trevor Eyton, deputy chairman of Edper Enterprises Ltd. He and the brothers' high-powered team of executives are spending marathon sessions at Edper headquarters in a swank Toronto office tower to make sure such speculation doesn't spread. But the parallels are spooking Canada's financial markets, still reeling from the 1992 collapse of O&Y. Like O&Y, Edper has huge exposure to depressed real estate. O&Y sagged under a $12 billion debt, and until recently, Canadian banks alone had an $8 billion exposure to Edper, counting debt and preferred shares, analysts estimate. Like the Reichmanns, the Bronfmans' empire is so convoluted that outsiders cannot easily understand what's being done or by whom. "And when you can't understand what's going on, you get terrified of what could be happening," says Ross Healy, CEO of Solvency Analysis Corp. of Toronto.

Those fears are also setting off alarms about how much damage the Bronfmans' problems could do to Canada's financial system. Exposure to Edper "is the largest liability facing the Canadian banks," says Alain Tuchmaier, a banking analyst at McLean McCarthy Ltd. In early February, Canada's superintendent of financial institutions asked banks, trust companies, and insurers to report confidentially to Ottawa on their exposure to Edper.

To avert an O&Y-like tailspin at Edper, the Bronfmans are quickly unloading some of the crown jewels in an empire that includes North America's largest public real estate company and Canada's biggest forest-product and insurance companies. On Feb. 9, the Bronfmans sold their 49% stake in MacMillan Bloedel Ltd., one of Canada's premier forest-product companies. Just three days later, they disposed of their 37% holding in John Labatt Ltd., Canada's No. 2 brewer and owner of the world champion Toronto Blue Jays.

Then, on Feb. 19, the creditors of Bramalea Ltd. approved a painful restructuring plan that will leave the Bronfmans with only 20%--down from 72%--of the shrunken developer, which once had some $5 billion in U. S. and Canadian real estate assets. And Edper officials are scrambling to find a buyer to help rescue troubled Royal Trustco Ltd., Canada's second-largest thrift. By the time it's all over, "Edper will be a hell of a lot smaller," predicts Lloyd Atkinson, chief economist of the Bank of Montreal. The empire that had assets of some $80 billion just a year ago could shrink by over 40%.

MORE FLEXIBLE. But the Edper sell-off will do more than that. It could change the face of corporate Canada. Thanks to the enormous power wielded by the Bronfmans, Reichmanns, and other families, until now some 70% of Canada's public companies have had a controlling shareholder, says David Leighton, professor at the University of Western Ontario. But as empires have unraveled in the 1990s, the dominant family stakes that controlled huge assets through leverage are giving way to more diversified shareholders, devolving more power to institutional investors and others. Canada's corporate landscape could come to resemble that of the U. S., with more independent companies on the Toronto Stock Exchange.

Meanwhile, though, Edper's onetime blue chips are getting battered on the TSE by bad news and fears of worse. At the peak of the 1980s bull market, Edper companies represented more than 10% of the value of the exchange. By the end of 1992, publicly held shares of the Edper group represented just 2.6% of the TSE, a one-year drop of more than $4 billion in market value.

With the storm gathering force, Edper executives are frantically working to downsize and restructure their diverse holdings. To restore confidence, they're hoping to prove to the markets just how much power the wounded giant still has. "We are much stronger and more solid than we've been portrayed," argues Eyton. As proof, he points to the $1.6 billion Edper raised in less than a week by selling Labatt and MacMillan Bloedel to institutional investors in the two largest-bought deals in Canadian history.

HALLMARK SECRECY. Perhaps most important, the sales demonstrate that comparisons with O&Y have some limits. For one thing, Edper is more diversified than O&Y, and its financing structure is more flexible. The Reichmanns relied heavily on short-term commercial paper, so a run on that paper easily triggered their collapse. In contrast, Edper has little commercial paper. Moreover, while most of O&Y's leverage was bank debt, Edper has made far greater use of both common and preferred equity. It has issued some $4 billion of preferred stock, which, unlike bank debt, cannot be called. The Bronfmans have also resisted the temptation to pledge stock in their resource companies against real estate debt. Such cross-collateralization meant O&Y had little room to maneuver when the crisis hit. In contrast, the Bronfmans can sell assets to raise cash, which improves their chances of recovery.

Still, steering through the crisis will be harrowing for the the enigmatic brothers. Peter Bronfman, 63, who has headed Edper since its beginnings in the 1960s, is a mystery even to most of Canada's business leaders. In 1978, in one of his only interviews, Peter Bronfman complained to biographer Peter Newman: "As soon as you say what your name is, there's a reaction. You see the cash register ring up in the person's eyes." Privacy is an obsession for the Bronfmans. Last year, their lieutenants successfully halted plans to publish a book about Edper by threatening legal action before the manuscript was even submitted.

Such secrecy is a hallmark of the Bronfman dynasty. Peter Bronfman and his older brother Edward are nephews of Samuel Bronfman, the legendary entrepreneur who built the Seagram Co. liquor fortune. Samuel cut Peter and Edward out of any role at Seagram to clear the way for his sons, Charles and Edgar, but the patriarch did leave them with $25 million in stock, which provided the seed money for Edper. Edward has a 19% stake in Edper Enterprises, the group's senior holding company. Peter holds a controlling 38% interest.

CASH SQUEEZE. Edper's spectacular expansion in the 1970s and 1980s was driven by acquisitions that were fueled by a financing system of cascading leverage. Under the system, the Bronfmans injected fresh equity into one of the senior holding companies and then asked public shareholders to match the investment in order to maintain their stake. The entire amount was then funneled down to the next company in the chain, where the process was repeated. Eventually, $100 million invested at the top could raise more than $1 billion for use by an operating company at the bottom of the pyramid.

The system worked brilliantly in the 1980s, when investors eagerly jumped on the Bronfman bandwagon. But it created enormous reverse leverage once recession took hold in 1990. Plunging commodity prices and the savage real estate downturn sent operating earnings plunging. At Noranda Inc., the group's single largest investment, earnings fell to just $62 million on sales of $6.8 billion in 1992, down from $476 million in 1988. Most of Edper's operating companies have slashed dividends, cutting income to the group's senior holding companies. The resulting cash-flow squeeze, says Tuchmaier, has made Edper "very dependent on external financing" to meet its enormous capital needs, including preferred dividends, interest charges, and capital expenditures.

BRIGHT SPOTS. Worried about their mounting exposure, Edper executives started in the fall of 1990 to "recession-proof" the group byselling assets, raisingequity, and issuinglong-term debentures. Through the end of 1992, they raised almost $8 billion. And there are some bright spots in their portfolio. Real estate markets are improving, and an emerging Canadian recovery, executives say, could cause earnings at Noranda to rise to over $300 million next year.

Beyond that, the Bronfmans are also taking steps to make Edper more accessible to investors. The holding company structure helped fuel growth, but it now scares investors off with its mingling of private and public companies. Officials say Edper will gradually eliminate the private holding companies and then combine most or all of the public ones. Eventually, there might be just one company at the top.

Restructuring Edper could take up to five years. And cleaning up the group's real estate woes could take just as long. With the economy improving and a workable strategy in place, the Bronfman empire will survive the crisis. But it will be a smaller, less powerful, and less feared presence on the Canadian stage.

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