Bruce Flatt is not a man to be rushed.
Since taking the top job at Brascan Corp. three years ago, the 40-year-old has promised sweeping changes. The complicated and hopelessly out-of-fashion conglomerate forged in the 1980s was to go. Brascan, Mr. Flatt explained time and again, would become a simple operating company, running office buildings and generating power.
Yet until last week, Mr. Flatt seemed to be running the same old company. Sure, stakes in beer and insurance were jettisoned, years back. But signature properties still included venerable Noranda Inc., a metal miner, and Norbord Inc., a manufacturer of oriented strandboard, a very complicated thing to make out of trees.
Well, it's funny how quickly things can change. Yesterday, Brascan and Noranda revealed they were in exclusive talks to sell one of the country's largest mining plays to China Minmetals Corp., a $6.6-billion proposition that could put $2.8-billion in Brascan's coffers. Going into these negotiations with the Chinese government-owned company, Noranda's stock has been on a tear, as surging demand for base metals and takeover speculation pushed the share price up 62 per cent over the past year.
Last week, Brascan raised $352-million by selling half of its Norbord stake, after riding a 75-per-cent rise in the stock over the past year.
If Minmetals can reach a deal, it will buy Noranda for cash at what was described yesterday as a "small premium" to the recent share price -- advisers to the two sides wrestled with this wording, rejecting adjectives such as "tiny" and "minor." Before Minmetals takes over, Noranda's aluminum assets would be spun out as a new, free-standing company that analysts estimate would be worth $1.1-billion.
If the two sides do strike a bargain, the long-running auction of Noranda still may not be over. Other suitors are circling, as evidenced by the fact that Noranda has promised a so-called break fee to Minmetals. The multimillion-dollar payment to Minmetals would only be made if a rival mining company swept in and topped the Chinese company's offer. One financier working on the transaction said: "The Chinese are trying their best to scare away other bidders."
No matter who claims control of Noranda, everyone is applauding the new Brascan. "I'm very pleased with the [Noranda]proposal," said Jim Mawer, who owns the conglomerate's stock at Calgary-based Mawer Investment Management. "Brascan is doing exactly what they said they would do, which is to scale out of natural resources and move into more stable, better cash-flow-generating assets."
The wiry, intense Mr. Flatt says the market is finally coming to recognize a transformation that has been long in the works. In an interview yesterday, he said: "The problem with announcing a strategy is that everyone expects you to wheel and deal and get there by dinner time tomorrow. Look where we've come from. Brascan was 80-per-cent resources a decade back."
In fact, parting with Noranda and Norbord at a time when commodity stocks are soaring would complete a decade-long yard sale at Brascan. The resource holdings that have already been packaged up and sold include forest products giant MacMillan Bloedel, oil companies Norcen and Canadian Hunter, and mining company Westmin.
Where has all the money generated by these sales gone? Well, Brascan now has $20-billion worth of the best office buildings on the planet, along with a collection of 120 hydroelectric dams and natural gas-driven generators. Mr. Flatt pounds away at the message: "This company is a simple one. We own buildings and power plants."
This transition from holding company to operator, from complex to simple, is about far more than optics. In the past, investors judged Brascan to be worth less than the sum of its parts, assigning the stock a price that was far less than the value of its underlying assets. This so-called holding company discount often meant a 20-per-cent-plus gap between Brascan's market capitalization, and the company's net asset value, or NAV.
As Mr. Flatt and his colleagues demonstrate their acumen at running a disciplined company, analyst Andrew Kuske at UBS Securities Canada is one of many Brascan watchers who sees the holding company discount shrinking, and eventually disappearing. Mr. Kuske said in a recent report: "We believe Brascan's transformation from a multitude of interests to a more focused operating company is likely to further boost share valuations."
Brascan's stock price is up 72 per cent in the past year, closing yesterday at $39, down 27 cents on the Toronto Stock Exchange.
The change in perception is worth tens of millions of dollars to the Brascan team. Mr. Flatt is one of about two dozen long-serving executives -- they refer to each other as partners and work across from one another in open-concept desks, not offices -- who together own 17 per cent of the company, an equity stake currently worth $1.7-billion.
Accumulating this kind of wealth at this young age speaks to the tenacious nature of the Winnipeg-born Mr. Flatt. He grew up talking portfolios with a father, Ian, who was a co-founder of Investors Group, the country's largest mutual fund manager.
After graduating from the University of Manitoba's business program in 1985, Mr. Flatt took an accounting job, then jumped into the Brascan group as chief financial officer of Hees International Bankcorp, the nerve centre for the old Brascan empire. In 1992, he moved into the real estate world at Brookfield Properties, helping rework what was then a troubled company.
A change in the way investors value Brascan is just a small part in the remaking of the company. Long before Noranda and Norbord went on the block, the team had begun expanding their power and real estate operations, and tapping into Canada's pension funds, the deepest pockets in the country. In buying, the company looks for premier properties that generate cash flow, and appreciate over time.
Bigger is better because small investments make little impact on a company with a $10-billion market capitalization. Mr. Flatt says: "We like situations where just a few decisions can make the shareholders a lot of money."
"Brascan's track record of surfacing value in recent years has been remarkable," said a report from analyst Neil Downey at RBC Dominion Securities. He added that investors need to be patient, for "while reinvestments could take several years to be implemented, the potential accretion is meaningful."
On the power front, Brascan now counts $4-billion in assets that started with a small hydroelectric holding in Northern Ontario, called Great Lakes Power. In its biggest deal to date, the power team expects that at the end of the month, it will close the $900-million (U.S.) purchase of 71 upstate New York generating plants owned by Reliant Energy Inc.
And despite the province's numerous flip flops on electricity policy, Brascan Power CEO Harry Goldgut says further expansion in Ontario is a goal, with the company interested in buying hydroelectric stations, or running any new generators brought on to replace coal plants. Brascan has also teamed up with Harmony Wind Energy in a bid to win a provincial contract for windmills -- Ontario wants to see wind generate up to 5 per cent of the province's electricity by 2007.
Again, the move into power took patience. Mr. Flatt says: "We committed to the power sector in the 1990s, then for three years, we sat on our hands, because we just couldn't buy anything that fit with our take on what represented value." When U.S. power generators began going bankrupt in the past three years, Brascan pounced.
When it comes to real estate, Brascan has a taste for prize locations. The company's future includes a stake in a lower Manhattan parking lot that will soon become the $1.8-billion head office of Goldman Sachs.
How big does Mr. Flatt dream? Well, he's already a major Manhattan landlord. And it's unclear just who will win the right to redevelop New York City's World Trade Center site, which has been tangled in lawsuits since the Sept. 11, 2001, terrorist attacks on the United States. But when the lawyers are done, don't be surprised if Brascan is raising a new Manhattan skyline from the rubble.
"We want to own the finest office space in major centres, cities that are 24-hour-a-day business hubs. In Canada, that's Calgary, Toronto and Montreal. In the U.S. market, there's cities like Boston, New York, Chicago, Washington, San Francisco and L.A. And obviously, we like London," Mr. Flatt says.
In Britain, Mr. Flatt showed just how the new Brascan operates. When a group led by investment dealer Morgan Stanley struck a deal to buy the storied Canary Wharf complex for $3-billion, Mr. Flatt quickly mounted a hostile rival bid, backed by the deep pockets of two pension funds, British Columbia Investment Management Corp. and the Ontario Teachers Pension Plan Board. Brascan was able to finally grab a 27-per-cent stake in the London property, ensuring the company continues to have a role, as Morgan Stanley's team tries to realize the potential of the 17-building complex.
Would Mr. Flatt go hostile again? The CEO pretends to be hurt by the word. "We made an unsolicited bid. You can say hostile, I don't." Then he smiles, and says Brascan will continue to be "opportunistic" as it builds its portfolio.
The pension fund involvement in the Canary Wharf bid is the most visible sign of an asset management arm that puts outside money to work in both Brascan projects and various other financial plays, such as a corporate restructuring venture, infrastructure investments such as timberlands, and hedge funds.
Right now, Brascan is running $7-billion (Canadian) of other people's money in its asset management arm. Mr. Flatt says this could easily rise to $30-billion of pension fund cash over the next decade. The beauty of these arrangements is outside money managers are willing to pay for Brascan's expertise. So Mr. Flatt and his team can boot-strap themselves into larger projects by pulling in the pension fund money, then turn around and charge a fee for its service.
The asset management business, real estate investments and power generators will take years to take shape. Mr. Flatt admits as much when he says "we're running this place looking out a decade or more." This CEO's not in a hurry. But as recent developments at Noranda and Norbord show, he's serious about taking Brascan to a whole new level.
Brascan: leaner and more focused
Brascan is transforming itself from a complex holding company to a simplified operating company focusing on real estate and
The new company
The new Brascan has a focus on $20-billion worth of businesses that produce consistent and sustainable cash flows.
REAL ESTATE holdings include interests in over 70 premier office properties in North America and Britain, such as London's Canary Wharf.
POWER COMPANIES include 120 power plants operating in North America and Brazil. The company is focused on hydroelectric power generation in the Northeast with growing investment in the development of wind power.
ASSETS UNDER MANAGEMENT: About $7-billion of assets under management are focused mainly on real estate, energy and resource sectors. Clients include deep-pocketed pension funds and life insurers.
he new Brascan has a focus on $20-billion worth of businesses that produce consistent and sustainable cash flows.
ASSETS UNDER MANAGEMENT: About $7-billion of assets under management are focused mainly on real estate, energy and resource sectors. Clients include deep-pocketed pension funds and life insurers.
The old Brascan was a complicated holding company whose assets included resource companies, financial services and a brewery.
The old company
FORESTRY PRODUCTS: While the company still owns interests in forestry products companies, such as Norbord, a manufacturer of oriented strandboard, and Fraser Papers (created by splitting Brascan subsidiary Nexfor Inc.), it sold MacMillan Bloedel.
MINING: Brascan sold mining company Westaim and is now in talks to sell Noranda, which could be worth $2.8-billion to the company.
BREWING, OIL, AND FINANCIAL SERVICES: The company sold brewery John Labatt and financial services companies Royal Trust and London Life. Brascan has also unloaded oil companies Norcen Energy and Canadian Hunter.
Andrew Willis