Help on the way for Canada's Massey-Ferguson
Shades of Lockheed and Chrysler. That is how Canadians view their government's massive bailout plan for financially troubled Massey-Ferguson Ltd., Canada's leading manufacturer of farm equipment.
Long a household name on Canadian farms -- and once in the vanguard of Canadian equipment exports -- Massey-Ferguson has been in trouble for more than a decade.
Like United States government officials, when first faced with the virtual bankruptcies of Lockheed and Chrysler, the Canadian government officials hoped against hope that Massey-Ferguson's troubles would somehow go away.
They did not, however, and Ottawa found itself in a dilemma -- unwilling to let one of Canada's few multinational companies go under, but reluctant at the same time to bail out a firm that had by most reckonings made horrendous mistakes.
Both the federal and Ontario provincial governments, nevertheless, have come to the rescue of the 133-year-old company which by Oct. 1 had more than $1.8 billion in debts.
Under terms of a complex refinancing plan, Massey-Ferguson will issue $365 million in new shareholder equity and convert $236 million of its heavy short-term debts into equity. Much of that debt is owed the Canadian Imperial Bank of Commerce, Massey-Ferguson's biggest lender.
The federal and provincial governments will guarantee a portion of the new equity investments by private investors, but not by the banks.
Whether all this is enough to save Massey-Ferguson remains to be seen. Some Canadian business spokesmen feel that the refinancing package together with the government's guarantees, while encouraging, is "a long way from a solution."
Another observer in Toronto suggested "only time will tell whether Massey-Ferguson will go under or not."
Behind Massey Ferguson's array of troubles are years of somewhat sloppy management, including inattention to the vital North American market while the firm launched a vigorous overseas expansion program. Bank borrowings were used to finance the expansion, rather than through the increase of new stock -- a tactic that led to a whopping debt load, as interest rates soared in the 1970s.
All this forced Massey-Ferguson into a position where it was increasingly dependent upon the overseas market, particularly the uncertain third world market, for its sales. Only 7 percent of Massey-Ferguson sales in 1979 were in Canada, another 28 percent in the US, with the remainder in Africa, Asia, Europe , and Latin America.
For example, the era of high interest rates eroded the Argentine market in the early 1970s. Massey-Ferguson had been in a strong position in Argentina for decades, holding 60 percent of the market through the 1960s and early 1970s. All farm equipment manufacturers suffered in the collapse of the Argentine market, but Massey-Ferguson had most to lose -- and it did lose.
Service costs on the debt, meanwhile, reached 20 percent by 1979, and in the first nine months of 1980, ending Oct. 31, the firm paid out $184 million in interest alone -- 8.1 percent of total sales.
Meanwhile, the Argus Corporation, a Canadian holding company had, beginning in the late 1960s, began acquiring Massey-Ferguson shares gradually. By the early 1970s, it had acquired control of the firm. To repay bank loans used to obtain the shares, the Argus-dominated board voted higher dividends on Massey-Ferguson shares, which in effect forced Massey-Ferguson to finance its own takeover.
But Argus also underwent a successful takeover by Conrad and Montegu Black. That led to Massey-Ferguson board chairmanship for Conrad Black. He quickly began a pruning of Massey-Ferguson's employee roster and a focusing of company manufacturing on tractors, combines, and diesels -- its core products. The tactics helped.
After a 1978 loss of $262 million, the largest not only in Massey-Ferguson history, but also Canadian history, the company reported a profit of $37 million in 1979 due in considerable measure to the tight spending rein by the new Argus management.
But the pruning and tight control on finance was not enough, for Massey-Ferguson in 1980 has slipped deeply into the red, although not as disastrously as in 1978. The problem was debt servicing, and the fact that many of the short-term loans began coming due this year.
Efforts to acquire new equity in 1979 failed as the recession in Canada began to be felt. And this year, the market for equity was no better -- and Massey-Ferguson's balance sheet was becoming a national scandal.
At that point, Massey-Ferguson management began exploring with the Canadian government the possibility of some sort of bailout -- loan guarantees on the purchase of equity.
The Canadian government has in the past rescued a number of companies such as de Havilland and Canadair, through purchase. However, there was reluctance in Ottawa to do the same for a company controlled by the Argus conglomerate, a firm viewed by many Canadians, including some in government, with considerable suspicion because of questionable business tactics.
Argus, meanwhile, began jockeying for ways to rid itself of the ailing Massey-Ferguson.Last month, it announced a plan to donate its 16.4 percent stake in Massey-Ferguson to the company's two employee pension funds -- a tidy deal that gave Argus a $23 million tax writeoff.
The government quickly named John Abell, a Toronto financier, to look into the possibility of refinancing between Massey-Ferguson and the Canadian Imperial Bank of Commerce and the Continental Bank of Illinos. The two banks hold 30 and 20 percent of the debt.
The result of his efforts was the rescue operation announced in late October. It will be some time, however, before the arrangement can be evaluated. In the meantime, 6,000 employees in Canada, another 41,000 overseas, 30,000 shareholders, and 250 banks around the world are waiting anxiously to see if the arrangement does in fact work.