Glencore's Bid For Teck Puts Pressure on Canada's Pension Giants?
Glencore's hostile bid for Teck Resources has galvanized some Canadian institutional investors, who have lobbied the federal government to push the nation's biggest pension funds to lift their exposure to domestic companies, according to a presentation seen by Reuters.
The previous unreported proposal is an unusual move, but mirrors the broader nationalistic sentiment at display in Canada since the Swiss miner's unsolicited approach for one of the country's top mining firms by market value.
Politicians and business lobby groups have asked the federal government to block the $22.5 billion bid and Ottawa has said Glencore would face rigorous scrutiny.
Canada's large pension funds are globally known investors, managing more than $1 trillion of savings, but their exposure to domestic equities has steadily declined over the past decade since Canadian equity markets represent just 3% of the global equity market. The Canadian pension funds have benchmarked their investments to that level, according to the presentation.
Australian pension funds have invested about 50% of their total assets in domestic equities, according to the presentation.
Last month, Teck pulled its proposal to split the company into separate coal and copper businesses after failing to secure shareholders' support.
China Investment Corp is Teck's single-biggest institutional investor with a 10.3% stake, and Norway's wealth fund, Norges Bank, owns 1.52%, while Canadian pensions together hold 0.78% stake, according to Refinitiv data.
Institutional investors argue, a more influential holding would have helped Teck to pull off its plan and ended Glencore's pursuit.
Peter Letko, vice president of Letko Brosseau, a Teck investor which was in favor of the separation plan, said the absence of Canadian pensions funds' from "critical public companies does not help the domestic economy."
Montreal-based Lekto said he has recently written to the federal government's finance ministry and provincial governments urging pension funds to increase their exposure in domestic market.
The finance ministry did not immediately respond to an email query.
PENSIONS AND POLITICS
Quebec pension fund CDPQ declined to comment on "political and legislation matters." All other pension funds did not respond to Reuters request for comments.
Canadian pension funds represent 30% of the total financial savings of Canadians.
"Given that so much of this capital is directed towards international investment, it risks not contributing to Canada’s economic growth," Letko added.
Not everyone, however, agrees with this approach.
Michael Osborne, a competition lawyer at law firm Cozen O'Connor, said the more you interfere with Canadian pensions' operations, "the more you put pension returns at risk."
"We all know from our own pension savings...putting all of your investments in one country - whether it's Canada or any other country - is a poor investment strategy."
Still, Lekto has found some backers, including Kim Shannon, founder of Sionna Investments and former board member of Canadian Committee for Corporate Governance. Shannon added that Canadian equities have generated better returns with lower risks over the past three decades.
Letko has also found support from some business leaders.
"It is really shameful that two of the biggest pension funds invested in Teck are Chinese and Norwegian," said Pierre Lassonde, a Canadian mining entrepreneur who offered to invest in Teck's coal assets to thwart Glencore's effort. Lassonde is also backing Letko's proposal.
Clement Gignac, a Canadian senator and a veteran economist, said while it is not the "business of politicians to decide which countries do the pension funds invest in," the industry as a whole should improve disclosures about where Canadians savings are invested.
Clara Denina of Reuters also reports that buying Teck's coal unit as a standalone a 'distant second' for Glencore - CEO:
Buying Teck Resources' coal business as a standalone unit is a "distant second" for Glencore and Teck should not leave out the Swiss miner if it keeps pursuing its separation plan, boss Gary Nagle told the Bank of America conference in Barcelona on Tuesday.
Teck has rebuffed the Swiss miner and trader's $22.5 billon offer to combine the two companies, instead pursuing plans to separate its copper and coal business.
But the Vancouver-based miner in April had to scrap its initial business separation proposal after failing to secure enough shareholder support, going back to the drawing board to rework what it said would be a "simpler and more direct" split.
Glencore's plan would combine and spin off its thermal coal unit and Teck's steelmaking coal business.
"Doing the full deal is the best offer for both sets of shareholders, it creates the most value – buying their coal business standalone is a distant second in terms of potential benefits," Nagle said in a fireside chat at the conference, according to a Bank of America note.
"If that is the route they go down I think it would be remiss of Teck in terms of value for shareholders to not include us in that process," Nagle said.
As part of its proposal, Glencore has offered up to $8.2 billion in cash to Teck shareholders who may not want exposure to thermal coal, the most polluting fossil fuel.
Speaking separately at the same conference, Teck CEO Jonathan Price repeated that separation "is the path to create the greatest value" for shareholders and said "we haven't heard anything further from Glencore with respect to changes to (their) proposal".
Glencore said it is willing to increase its offer.
Whatever happens with this Glencore bid on Teck, I think we need to take a step back and stop making investment decisions for Canada's large pension funds.
You can state your opinion -- God knows I do it all the time like when I recently questioned why Canada's large pension funds invest so much in China which is a giant communist country.
Unlike Peter Letko, my preference is the US market, not Canadian, Australian, European or Japanese market but good old US stock market.
Canada's large pension funds primarily invest in US stocks, then European and Asian stocks, then Canadian, Australian, etc.
I'm fine with this but some of my friends think Canadian pension funds need to invest more domestically to lend support to companies here, much like CDPQ does for Quebec-based businesses.
Call me skeptical but the job of a pension fund isn't to support domestic companies, governments do this through grants, subsidies and other means, the job of Canada's large pension funds is to make the best risk-adjusted returns all over the world in public and private markets to make sure they have enough assets to cover long-dated liabilities.
I cringe when I hear smart people like Peter Letko say that Canada's large pensions need to support domestic companies.
Absolute rubbish and I don't care what Australian pension funds are doing, I know ours are managed better and in the best interests of all stakeholders over the long run.
Ironically, Letko Brosseau has been a Teck investor for a very long time and done very well there, especially over the last three years.
Many of you do not know this but when Teck shares fell below $2 back in early 2009, CDPQ was dumping their stake like crazy fearing the company would go bankrupt and Letsko Brosseau was on the other side scooping them up, making a killing in the process:
Good for them, they are top money managers which is why I track their portfolio closely, but when it comes to pension policy, I ignore them and so do Canada's large pension behemoths.
The next two years will be very challenging for all institutional asset managers and that includes the great Letko Brosseau.
Had a conversation with Malcolm Hamilton earlier and he told me he feels we are heading back to the 1970s where markets didn't do well for a very long time.
"Canada's large pension funds didn't exist in their current state back then so it will be interesting to see how they fare in a very challenging environment."
Indeed, it will be interesting but let me end on this note.
I agree with my former boss Senator Clement Gignac that while we cannot force Canadian pension funds to invest more domestically, they all need to be a lot more transparent and disclose exactly where they invest in detail (sector, strategy, geography, etc.)
I would force all of Canada's large pensions to have a link on their website updating detailed asset mix by sector, geography, asset mix and more.
That's all I have to say on this ongoing discussion about Canada's large pension funds needing to up their domestic stakes.
For Petes's sake, we are heading into a nasty and prolonged global recession/ depression, I couldn't care less if Glencore wants to buy Teck, we have much, much bigger concerns going forward.
Below, a month ago, Teck Resources CEO Jonathan Price explains why Teck formally rejected Glencore's $23 billion takeover offer during an interview with Jon Erlichman.
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