Dundee directors, staff to get $12-million in REIT deal

Directors and employees of Dundee Realty Corp. stand to get $12-million in special cash payments if the company's conversion to an investment trust is approved, even though a leading bank says the proposed deal is a "financially inadequate" one for minority shareholders.

Under the deal, Dundee insiders can receive cash for their unexercised stock options, regardless of how long they have held them. The payout for each option is the difference between the exercise price and $24.

The clause means Dundee directors could gain a total of $1.35-million in payments for relinquishing options they granted themselves less than six months ago, in early January -- after the company began discussing a reorganization but before the plan was announced publicly.

"At the time the directors received their options, there was no assurance that this deal was ever going to go through," said Ned Goodman, chairman of Dundee Realty and chief executive officer of Dundee Bancorp Inc., the real estate firm's major shareholder.

He said the directors had voluntarily given up some of their options about one year earlier, and it would have been unfair to them and the employees to not pay out for the options.

Dundee is proposing to fold its industrial and office properties into a new real estate investment trust (REIT). Some of the company's holdings -- including its land and housing development arm -- will not be part of the REIT, but will instead form a wholly owned subsidiary of Dundee Bancorp. Under the plan, Dundee Realty investors will receive $3 a share for those assets.

But a fairness opinion done by RBC Dominion Securities Inc. found the deal to be "financially inadequate." RBC said the assets Dundee Bancorp is taking are worth between $6.50 and $8.50 a share -- more than double what minority shareholders are receiving in the cash part of the deal.

Major shareholder the Ontario Teachers Pension Plan Board said it will vote against the transaction, citing the RBC valuation.

Teachers owned about 95,000 shares in Dundee Realty as of the end of 2002, or less than 1 per cent of the stock.

Bill Mackenzie, president of proxy adviser Fairvest Corp., said his firm is recommending shareholders reject the REIT plan.

"We agree with the [RBC] opinion. It's not a fair deal," he said.

Mr. Mackenzie accused Dundee's inside shareholders of "using the advanced tax treatment of income trusts to further their interests," and said the directors are "conflicted" because they stand to get cash for their options.

"It would have been nice if instead of cash, they got units [in the REIT]," he said.

The board has refused to give shareholders a formal recommendation on which way they should vote. Both the directors and management have said they will cast their own shares in favour of it.

"We took a stock that was trading at $15 and we're going to give the shareholders close to $25. . . . If they vote it down it's going back to $15," Mr. Goodman said.

Dundee Realty shares closed at $23.05 on the Toronto Stock Exchange yesterday.

The RBC valuation does not give enough credit to the new structure's tax efficiency for public unitholders of the REIT, Mr. Goodman said. Dundee Bancorp is accepting a $40-million tax liability that would otherwise have to be paid by Dundee Realty if it remained a corporation, he said.

Mr. Goodman said the non-REIT assets would be worth less than $3 a share, not more as RBC claimed, if they were left in a public company.

"You're talking about a broad group of undeveloped land acreage in a hot housing market," he said. "We are not going to develop all that land next month or next week or next year. And when we do go to develop it I'm not sure what it's worth."

Several of Dundee Realty's top managers, including chief executive officer Michael Cooper, will not receive cash for most of their options. Instead, they will exchange them for a stake in the privatized, non-REIT assets.

Charles Dillingham, a portfolio manager at Morguard Financial Corp., which owns Dundee Realty shares, was undecided on how he will vote at Monday's meeting.

"My inclination is to support it," he said.

While he said he has questions about whether shareholders are receiving full value, he is concerned the stock will plunge if the REIT plan does not pass.