Ontario Supercorp dead in the water

Ontario Supercorp cancellation ends a proposed public assets conglomerate, citing accounting, legal, taxation, valuation, and transaction risks, control and governance concerns, pension fund reluctance, and auditor rules requiring proceeds to reduce debt.

Ontario Finance Minister Dwight Duncan has unequivocally ruled out the controversial idea of merging four of Ontario's biggest Crown corporations, then selling off a chunk of them.

“We are not proceeding with what the media have called Supercorp,” Mr. Duncan said in an exclusive interview, acknowledging that the government was dissuaded by “the sheer size of this thing, and how unwieldy it would be.”

Since the Liberals began considering the Supercorp model – which would likely have included Hydro One utility operator, Ontario Power Generation, the Ontario Lottery and Gaming Corporation and the LCBO – in late 2009, it was a source of considerable dissent in their ranks. But while conceding that “you don't want to be accused of a fire sale,” Mr. Duncan insisted it was logistical issues that dissuaded the government from even formally taking the idea to cabinet.

The Finance Minister cited a report by CIBC and Goldman Sachs, which were commissioned by the government to examine asset-sale possibilities. He said there were five “major sets of issues” identified by the banks, which he described as “serious accounting issues, legal issues, taxation issues, valuation issues, and what I would generally call transaction issues.”

Senior Liberals had previously suggested the proceeds from Supercorp could be used for capital investments, likely in post-secondary education, that would help fill out their platform in next year’s provincial election. But Mr. Duncan said any upfront investment of proceeds would have “run afoul of the auditor.”

“We would have to have applied the immediate proceeds against the debt,” Mr. Duncan said. He added that the only way to immediately channel them toward expenditures would have been to set up a trust, “which auditors don’t like.”

“We knew there would be accounting issues,” he said. “We had hoped we could overcome them. We can’t.”

Mr. Duncan conceded that general discomfort with the concept of a conglomerate also helped kill it. The large pension funds, considered the likeliest buyers of minority shares, “weren’t too keen on it.” And “others in the business said that this idea of taking all of them and putting them into one corporation wouldn’t necessarily maximize their value.”

There were also issues around the government’s aim to maintain majority ownership – and presumably some degree of operational control, including discussion of a non-profit option for Hydro One – while trying to get maximum dollar for Supercorp shares. “For retaining any kind of control,” Mr. Duncan said, “you have to pay for it.”

Further disincentive was provided by the taxation issues, which would likely have seen the federal government collect tax from assets currently exempt.

While reluctant to attribute the decision primarily to political considerations, Mr. Duncan acknowledged it was “difficult” when Supercorp took on “a life of its own,” because the Liberals weren’t yet prepared to make a case for it.

Privately, many government insiders have suggested that opponents of a potential deal got too much of a head start on framing the issue in the context of privatization plans that were widely debated for the Liberals to convince voters of its merits – particularly given the limited amount of time before next year’s election.

Mr. Duncan dismissed the prospect of Supercorp being revived after that campaign. “This kind of model, as we looked at it right now, certainly would not be pursued in the future,” he said.

After the province began seriously considering various asset-sale possibilities, Hydro One IPO scenarios were discussed as Supercorp emerged as the option with the most momentum. With Infrastructure Ontario president David Livingston – and to a lesser extent Mr. Duncan – as its champion, the concept was sold internally as a way to both increase revenues and to make assets more accountable and perhaps more aggressive in their strategies.

Even with that option off the table, Mr. Duncan said there will be no short-term consideration of individually selling any of the assets, such as Ontario Hydro business units, that would have made up the conglomerate. He said the government would likely be proceeding on the restructuring of “smaller assets,” but that such moves would involve “hundreds of millions of dollars,” not “tens of billions.” He and other government officials declined to provide examples of what sort of entities those might be.

Although establishing the equivalent of a Fortune 500 company would have given Mr. Duncan a unique legacy as finance minister, even amid a cash squeeze in provincial finances, he insisted he was not let down by the decision.

“I’m not disappointed,” he said. “I satisfied myself that we’re maximizing the value of those assets at the moment, in part through a hydro partnership approach where appropriate.

“We’ve learned a lot of lessons.”

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