The 'privatization' of a British Columbia corporation

Most people have heard of nationalization of a company. Fewer, however, know about that rare financial phenomenon, "privatization." It means turning over a nationalized enterprise to the private sector of the economy, and that's what happened in 1979 to British Columbia Resources Investment Corporation.

So far, this free enterprise phoenix has been doing rather well, at least certainly as far as growth is concerned. It may well prove to be a model for capitalist-oriented governments in other nations trying to figure out what to do with nationalized companies.

B.C. Resources was "privatized" by this province's Social Credit (conservative) government. It combined some nationalized forest product companies, government-owned shares of a natural-gas pipeline company, and oil and gas acreage into the newly created company and gave each qualifying resident of the province five free common shares.

Some 2 million residents applied for their free shares (including children), or about 86 percent of British Columbians. Another 128,000, residents of the province or Canadians living elsewhere, paid $487.5 million at $6 per share for an additional 79.3 million shares -- some 2.5 times larger a stock issue than any before in Canada and third in North America behind issues by Ford and TWA.

At that time it was reckoned that B.C. Resources stock was the most widely distributed of all after American Telephone & Telegraph Company. It probably remains so today since General Motors has only 1.2 million stockholders "of record" -- though probably more than that since many stocks are held by brokerage companies in their names for customers.

Today B.C. Resources reckons it has "more than 1 million shareholders" with bearer certificates (whose owners are unknown to the company), and another 133, 000 registered shareholders. (Before the creation of B.C. Resources, there were only an estimated 60,000 shareholders of any sort in the province.) Apparently some provincial residents have sold their shares since the original distribution.

Nonetheless, ownership remains more than sufficiently widespread in this province that nearly any development at "Brick" -- as it is now informally called -- makes the news. Indeed, when the company held its lively second annual meeting May 4, it was front-page news for the province's major newspapers.

"There are a lot of first-time investors represented in this company," noted Bruce I. Howe, president and chief executive officer, in an interview. "They have a different kind of concern. It's an understandable gut-level concern."

Some 10,000 to 15,000 of these investors, many relatively unsophisticated, call or write into the company per month. One concern is a decline in the price of the stock recently to about $5.25 a share. Another is the lack of a dividend. They ask, said Mr. Howe: "You guys make a profit. Where is my money?"

Mr. Howe promises that when he and the company's board are confident that there is a stability in the pattern of earnings that can be sustained, the company will announce a dividend.

However, when it does, it will create another unusual problem. With most of the stockholders holding less than 100 unregistered shares but totaling some 10 million bearer shares, an inexpensive way for distributing the dividend must be devised. Mr. Howe does not know yet how that can be done.

Another reason for this company's prominence in the province is politics. In 1972 the New Democratic Party won an election, interrupting over 20 years of consecutive sacred rule. The NDP advocated, among other things, a socialist philosophy of government ownership of major natural resource companies in the province. In the three years the party held power it acquired a number of private companies, including some 81 percent of Canadian Cellulose (then Columbia Cellulose) from Celanese Corporation; Plateau Mills, a northern British Columbia interior sawmilling operation; Kootenay Forest Products, a sawmill and plywood manufacturer located in the southern interior of the province, and approximately 10 percent of Wetcoast Transmission.

The Social Credit government was reelected in December 1975 on a "free enterprise" platform. This included the concept of returning government-owned assets to private hands.The above nationalized companies were given to "Brick," plus some 2.3 million acres of oil and gas properties in northeastern British Columbia. The latter provided a broader "resources" base and added speculative appeal as well.

"By criticizing the company," explained Mr. Howe, "people are also criticizing the government which gave birth to it."

However, the government has chosen not to interfere in the company's affairs, though it owns the largest single block of more than 4 million shares.

Observers note that the government may not want to be too closely linked by the public to "Brick" for political reasons, especially if its shares do not prosper on the Vancouver Stock Exchange.

In any case, Mr. Howe says: "I have taken the position of ignoring the government as a shareholder."

Another reason for the high interest here in the company is provincial pride. British Columbians still regard it as theirm company (rightfully so, when they are shareholders) exploiting theirm provincial resources. "Investors have more than economics in front of them when they are the owners of this company," said Mr. Howe.

Actually, stock ownership is limited by charter to Canadians.However, some foreigners (usually Americans) have picked up bearer shares. There is little the company can do about it except to refuse to register them should a foreigner acquire the necessary 100 shares needed for registration."

There's a fourth reason for the company's newsworthiness: It has been using its cash for acquisitions.

Last year it purchased at a cost of $672 million Kaiser Steel's 66 percent holding of Kaiser Resources Ltd., which mines mostly metallurgical coal in southeastern British Columbia. Some $315 million of the purchase money came from available funds and the balance was financed by banks. This gave "Brick" control of a company with proven reserves of 1.3 billion metric tons of coal, and with projected and partially explored reserves of an additional 11.8 billion tons.

The Kaiser acquisition, renamed B.C. Coal, was controversial. Critics said B.C. Resources paid too much. But investment analysts upheld the deal and that criticism has been fading.

"Brick" also bought 20 percent of MacMillan Bloedel Ltd., the largest forest products company in the province. However, it lost a bidding battle this spring for control of MacMillan Bloedel to Noranda Mines. It then sold its 20 percent share for a capital gain of $57 million (or after-tax profit of $33 million) on a total investment of $157 million -- not bad for a loser.

However, with the forest products industry depressed by high interest rates, the company has not been highly profitable yet. Its consolidated net earnings amounted to $47.9 million on $520.4 million in revenues last year, and, reflecting fully the acquisition of Kaiser Resources, $2.7 million on total revenues of $221.6 million in the first quarter of this year. Total sales this year are expected to run around $1 billion. The company has debts of about $440 million on an asset base of $1.7 billion, which Mr. Howe terms a "very conservative" debt ratio. Critics argue the company is debt-heavy.

T. M. Ohashi, director of research here for Pemberton Securities Ltd., figures the value of the assets owned by the company are worth $10 a share -- double its current market price. "It represents very good value for investors prepared to wait for the forest products market to turn around and for the oil and gas issue in Canada to straighten out." There is a dispute in Canada between the federal and provincial governments on the pricing of oil.

Mr. Howe thinks his company's stock so attractive he may decide to buy back some shares on the open market for the company treasury.

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