What's Riding on the Magna Decision?

Jun.21.10 | About: Magna International (MGA)

By Andrew Willis

Magna International’s (NYSE:MGA) plan to get rid of a dual share structure get a workover from regulators on Wednesday, and analysts see a 30%-plus swing in the auto parts maker’s valuation riding on the hearing.

Magna founder Frank Stronach agreed to give up the multiple voting shares that allow his family to control the company, in return for $863 million payout of cash and shares. Analysts are generally in favor of the deal, while portfolio managers are split in their view, with several public sector plans actively opposed. The Ontario Securities Commission will review the deal on Wednesday, and Magna shareholders must also approve the arrangement.

While we concede that the terms of the proposal could be more compelling, we believe approval of the transaction is net positive over the long term on a number of fronts,” said UBS analyst Tasneem Azim in a report on Monday.

“In the best case scenario (shareholder vote is allowed to proceed, and the proposal is approved), we estimate a closing of the valuation gap between Magna and its peers would imply 17% upside from current price levels,” said Ms. Azim.

“In the worst case scenario (shareholder vote is blocked), we would expect MGA’s average valuation discount to its peers of 30% to reset, which implies 5% to 10% downside from current levels,” said the UBS analyst.