No. of Recommendations: 11
As expected, the proposal to issue not quite 102 million new BNRE shares available for exchange to BN shareholders on a 1-for-1 basis passed at yesterday's virtual BNRE annual meeting. Once the required NYSE and TSE paperwork is done, BN shareholders will be receiving the offer.
A couple of oddities for which no explanation springs immediately to mind other than Brookfield's normal inscrutability:
* No mention of the vote is included in BNRE's press release coming out of the annual meeting. The press release contains only the results of balloting for board members. You have to go to the filings on the SEC website and open the Form 6K filed yesterday to find the results. Of a little more than 6 million votes cast, 174,486, or 3%, voted no.
* The public offering is for 40 million shares, less than half the total authorization. I'm guessing that means the other ~62 million are already subscribed, by institutional partners and/or insiders.
As mentioned in the original post, the immediate incentive to exchange BN for BNRE would be to avoid Canadian withholding tax on the identical dividends with BNRE based in Bermuda. This would only benefit residents of tax havens, since other jurisdictions, including the U.S., impose their own taxes on dividends. Brookfield's opaque nod to this incentive is a reference to "personal circumstances" making it potentially advisable.
https://bnre.brookfield.com/sites/brookfield-bnre/...A longer-term incentive might be if a BN shareholder likes the emerging shape of the insurance/reinsurance/annuity business and anticipates a delinking of the "paired" tickers at some point in the future. Which of three tickers will benefit most from any success in this business remains a mystery to me given the fact that BAM will be managing most of the insurance float. A max of 2.5% of BN's share count could be exchanged before hitting the 40 million share ceiling.
<editorial remarks>
A handful of no votes represent my small allocation of BNRE shares from the spinout two years ago because I find the accelerating pace of financial engineering exhausting and annoying. Within my deteriorating memory:
* The spinouts of parts of four income-oriented limited partnerships (BIP, BEP, BPY and BBU) ostensibly aimed at income investors and retirees.
* Four more tickers representing corporate versions of those subsidiary limited partnerships (BEPC, BIPC, BPYU and BBUC). In a typical example of Brookfield opacity, the only apparent explanation for this proliferation of twin tickers for the same subs was the IRS determination that capital gains on limited partnerships in tax-deferred accounts might count as UBTI, making them taxable. However, Brookfield continues to market the partnership versions as suitable for IRAs, which seems either disingenuous or contradictory.
* Complaining about BPY's public valuation and ultimately taking it and BPYU private.
* Spinning out BNRE as a "paired" security with the parent (ticker BAM at the time) in tiny quantities, propping up the new ticker by making it exchangeable for the parent.
* Complaining about BAM's public valuation and ultimately renaming it, re-tickering it, and spinning out the "new" BAM.
Certain advocates of Brookfield's value sensibility and stock market performance used to advertise it as "the Berkshire of Canada." All the financial engineering around this dizzying array of tickers, spinouts and share exchanges makes this claim seem ridiculous. It's also worth pointing out that very little of this engineering has had the desired effects:
* The corporate versions of the partnership subs all trade at significant premiums to their twins, mostly because of supply and demand, imposing a penalty on those who want to hold them in retirement accounts, originally the ostensible beneficiaries of these income-oriented subs.
* Taking BPY private has done nothing to change Mr. Market's valuation, which it now imposes on BN, the new ticker for the parent. It may, as Bruce Flatt insists, reap a big reward one day when the CRE market recovers, but it won't benefit former BPY holders.
* Spinning out 25% of the asset management business as the new BAM had the desired effect of achieving a pure market multiple for that asset-light business. It has not, however, had the desired effect of inflating the parent's valuation based on its majority ownership of that business. To the contrary, the spinout coincided with a reduction in the parent's valuation roughly twice the value of the spin that has persisted to this day.
So there's a rational case to be made that all this engineering has been harmful to shareholders and the overall franchise and should stop. An interesting mental exercise is imagining the current valuation of the original BAM if everything Brookfield does was still represented by that single ticker. Alas, the pace of fiddling seems to be increasing, not slowing. Other than John Malone, I can't think of any other major market participant as fond of such difficult-to-follow public market manipulations.
I still like the
substance of Brookfield's business. I'm just tired of trying to keep up with the constant changes in packaging. So my plan is to cast my insignificant votes against future maneuvering with no simple, obvious purpose. It won't make any difference, of course, but sometimes symbolic protest is all you can do.
</editorial remarks>
