Hell or High Water

by Paul Martin

  He pointed out that I didn’t have the money. However, recognizing that I was an important part of any sale because of my knowledge of the company, he said he was willing to give me a chance.

  “I’ll make you a deal,” he said. “I don’t want you shopping the company around while you try to find a partner. So I’ll give you one shot at it and a few weeks to find a partner and a bank, but if it doesn’t work out, then I want you to sell the company to the best available buyer.”

  I said, “Deal.”

  Then he asked me about the bank, and I said I wanted to work with the Royal Bank, which had always been CSL’s banker as well as Power Corporation’s, but I knew that they would not deal without his okay. Desmarais phoned a vice-president at the Royal Bank and told him: “Paul Martin wants to buy Canada Steamship Lines. It’s up to you whether you want to lend him the money, but I want you to know that he has my permission to talk to you.”

  Ten minutes later, I was walking across the street to see Ladi Pathy, who was the president of Fednav, the largest Canadian deep-sea shipping company. Pathy is one of the most successful but least known of Canada’s business leaders. He has quite a story. He was born of Hungarian parents in Alexandria in Egypt, where his father, Ladislas Pathy, was Hungarian consul general prior to the Second World War. Those who have read Michael Ondaatje’s novel The English Patient may remember that there was another Hungarian expatriate in the region at the time, Count Almasy — who is portrayed in the novel as a dashing, romantic figure. In truth, he was a Nazi double-agent.

  Ladi has given me permission to quote the following passage from an oral history dictated by his father, which provides some insight into the adventures of the sinister count. “It would appear that at the time of El Alamein at the end of June 1942, Almasy — who by then was an A.D.C. [Aide-de-Camp] to Rommel — came over from the German lines in a British jeep and British uniform to the British lines. The British followed him, and he spent some ten days at the Shepheard’s Hotel in Cairo. At the end of his stay the British permitted him to return to the German lines, which he did, except that he lost his briefcase. In other words, the briefcase was taken by the British. In that briefcase a number of interesting documents were discovered, including a list of some 90 people who were to be the first to be arrested — whenever the Germans would enter Cairo or Alexandria. One of the names in this list was mine.”

  Of course, the British eventually threw Rommel’s army back without ever giving him the chance to round anybody up in Egypt’s great cities. The Pathy family continued to live in Egypt for the remainder of the war, and afterwards Ladislas Pathy continued his business career in shipping and insurance. He and his three brothers also acquired the Egyptian franchise for Coca-Cola, which was an instant sensation there. A Time magazine article in 1950, about Coca-Cola’s “conquest” of the globe, described the Pathy brothers as “Egypt’s shrewdest businessmen.” However, the Pathys left Egypt after King Farouk was deposed in 1952 by a coup that brought Gamel Abdel Nasser to power and a wave of nationalization of industry. Ladi’s family then moved to the United States, where he had already gone to attend boarding school. After graduating from Princeton University and NYU law school, he ended up in Montreal with his wife, Constance, who is Dutch, but as a young girl lived all over the world. He joined Fednav, which at that time was a small family-owned shipping business founded by one of his uncles in 1944. He later bought out his father and his uncle and built Fednav into a great international shipping company with headquarters in Montreal.

  Ladi and I had become acquainted during my early years at CSL. When the opportunity arose to buy the company, he happened to be sitting on a lot of cash from an unsuccessful run he had taken at acquiring Abitibi Paper but that had nonetheless yielded him a significant profit. In the ten minutes it took to walk from Paul Desmarais’s office to Ladi’s, I worked out the elements of a leveraged buyout in my head. I didn’t have much money personally, but I knew the company inside out and I controlled the deal. My idea was that Ladi and I would each put up an amount equal to my (modest) total net worth for the common shares of CSL, which would give us equal control over the company. However, Ladi was also going to have to come up with an investment many times larger, in order to provide the equity base, which he would take in the form of preferred shares. Although they wouldn’t confer any control over the company, these shares would put him first in line to get his money back if things went wrong. The rest of the money — the lion’s share, in fact — would have to come from the bank, which would loan us money secured by CSL’s assets. It took perhaps twenty minutes to lay out my plan and another twenty minutes for us to discuss it. Then Ladi and I shook hands, and that was it.

  The next day, I flew to Toronto to speak to the bank. I had enough equity investment from Ladi to convince the Royal Bank to come in behind the deal. Within a week, I was back in Power’s offices, ready to offer something in the order of $160 million for the company. But, to my shock, Paul Desmarais balked. He had concluded the CP deal wasn’t going to come through and had decided to hold on to CSL. You can imagine how I felt. Luckily for me, a week later, he phoned me to say that the CP deal was back on1 and that we could start talking again.

  The negotiations over the buyout lasted several months, and they transformed my relationship with Paul Desmarais. Up until then, I had always been an employee — one with ideas of his own but still an employee. I needed to bargain hard if I was to have any chance of success, however, and Desmarais was an equally tough negotiator, as was Power’s president, Jim Burns. Many times John Rae, later the organizer of Jean Chrétien’s campaigns, who was and is an executive at Power, kept the bargaining rolling by pushing both sides back to the table. At one point, I became quite discouraged about my chances of getting a deal, whose failure I increasingly realized would have huge negative implications for my career. My relationship with Desmarais had been so completely transformed in the previous weeks that it seemed unlikely he would want me to stay on as a subordinate. Though I enjoyed a good salary at Power, I had not really accumulated much wealth, and Sheila and I had a young family. Sheila had been very supportive from the beginning, but if the takeover fell through, in my own heart I knew I was gone from Power.

  It was in this period that by chance I bumped into Maurice Strong on an airplane. We arranged to sit together, and I opened up to him about the state of the negotiations and my fears about their possible failure.

  “Don’t worry about that,” he told me. “I’m working on several deals at the moment, and I could fit you easily into any one of them.”

  To this day I have no idea what he had on the go, but that conversation restored my certainty that I wanted to be my own man and that if the CSL deal fell through, I had options. I knew that I had crossed my Rubicon, and I went back to the bargaining table. We launched into a marathon thirty-six-hour negotiating session with me, my team, and Ladi’s team on one side and a succession of Power executives on the other. Something that served me well in my business career (and later in politics) was my ability with numbers in a negotiation. I was no mathematician, as my schoolday travails with algebra bear witness, but just as some people can just sit down at a piano and play, I always had a feel for the numbers. In any business deal, the central issue is the “present value” of the future cash flows stemming from an asset about to change hands. I don’t know how, but even with complex configurations under discussion, I could intuit what the value was. After the accountants had been sent off to do their calculations, they’d often come back with a result just minute decimal points off the figure I had been working with.

  The negotiations were held in the offices of a law firm, and we would shuttle back and forth between our respective meeting rooms and the main table in the firm’s boardroom. Ladi recalls that at one point in the discussions, he came over to the law offices to see how things were going but was having trouble finding me. When he got to the firm’s library, he saw some feet sticking out from between the stacks. I
t was me, catnapping, a talent that always led me to try to conclude a negotiation in one marathon session if I could — a practice I continued when I went into politics. Finally, on August 8, 1981, we reached a deal with Power and the company was ours.

  I remember walking into CSL the next morning and sitting down behind my desk. I own the company, I thought. I’ve done it. Never before or since do I remember having a moment quite like that.

  In the end, Ladi and I paid about $180 million for CSL: the largest leveraged buyout in Canadian history to that point. Perhaps I should say “overpaid,” because that is what we most certainly did. But I have always taken the view that if a company is worthwhile, overpaying is the least of your problems — if it isn’t worthwhile, underpaying isn’t going to get you out of a mess.

  From our perspective, the deal was a gamble on four counts. Our goal was to build a global shipping company focusing on self-unloading technology. First: In order to do so we had to sell the trucking and bus companies for a reasonable price, so that we had the money to reinvest in new ships. We did! Second: We had to reinvest heavily in new lakers in order to increase efficiency and market share pending a turnaround in the Great Lakes market. The problem was, we were doing so at a time when most experts thought the turnaround would never happen. This worked out. Third: We had to build ocean-going self-unloaders at huge cost on the hope we could convince customers in certain niche international markets who had never used self-unloaders to give them a try. This worked out. Fourth, and this was the biggest risk of all, the deal was really an enormous gamble on interest rates.

  This was the period of high inflation and skyrocketing interest rates. We negotiated on an assumption of 20 per cent rates, and on the day we signed the agreement, they hit 22 per cent, the highest ever interest rates in Canadian history. At the time, Henry Kaufman, the leading Wall Street prognosticator of interest rates, was predicting they would top out in the 30 per cent range. If they did that, we were dead. But I had the feeling that if they rose that quickly, they were likely to come down quickly too. We structured the deal to give ourselves a couple of years’ breathing room whatever happened, and instead of rising, in the months after the deal rates eased to around 14 per cent and our gamble paid off. People sometimes said to me later: “What an enormous chance you took.” Well, I have an answer for that. If you don’t take the opportunity when it is there for you, don’t expect it to return a second time. When I look back on it now, it was the same spirit that inspired my first bid for the Liberal leadership in 1990: the opportunity was there, so why not?

  Ladi’s experience in the international shipping markets was crucial to making the CSL deal go through. We needed to sell some of the company’s ships offshore to raise cash and then lease them back so that our business would not be affected — something he was able to manage because of his knowledge of the global industry, which certainly exceeded mine. Once we acquired the company, I was able to pursue my vision of taking CSL global. My goal was to see CSL become the biggest self-unloader operator in the world, which it eventually did thanks largely to the management team that succeeded me when I went on to other things.

  Hard as it may be to believe now, Ladi and I did this all on the original handshake. It wasn’t until five or six years into our partnership that it occurred to us that if one of us died, it was going to be a mess for the families to sort out, and we committed our arrangement to paper. I was also beginning to think about whether my sons might want to play a role in CSL one day and about my own desire to be my own boss. To this end, in 1987, I approached Ladi, whose shipping interests were vast in comparison with my own, and asked him if he would sell his shares. He understood why I wanted him to do this — and agreed.

  In my view, Ladi Pathy is one of Canada’s unrecognized treasures — an extraordinary Canadian almost unknown to his fellow citizens. He owns and manages a business that operates all over the world and could live anywhere he wants to. He came to Canada relatively late in life but has chosen to put down roots here. When I asked him about that once, he had a straightforward answer, which is the measure of the man. He and his wife, Constance, love Canada. They both grew up in several countries, none of which they could ever call home. They wanted something different for their two sons, Paul and Mark. They wanted a country they could call their own.

  When I first read the passage I quoted above from Ladi’s father’s wartime reminiscences, in which he describes the danger the family would have been in had Rommel overrun Egypt as he planned, I thought about how different Ladi’s life might have been. I mentioned this to Sheila and she said, “Yes, but think how different yours would have been too.”

  Ladi’s farm is near to ours in the Eastern Townships, and we continue to this day to be good friends. Along with Brian Gallery, Paul Echenberg, who worked with me at Connie Bathurst, and Huck Henry (a close friend who introduced me to much of the Toronto business community), we play golf regularly. The fact that they are the only people I can reliably beat is no coincidence.

  My experience with CSL was closely linked with my political and economic ideas, both before and since. While many of the political elites were consumed with constitutional issues in the 1970s and early 1980s, my thoughts were going in a different direction. Growing up in Windsor in the shadow of America’s industrial might, I had always felt the rivalry with the United States. As a young man, I was a “Walter Gordon nationalist.” Walter Gordon had been finance minister for a time under Lester Pearson, and later went on to become one of the founders of an influential group called the Committee for an Independent Canada. In later years, although my dad and Mr. Gordon were anything but close, he was kind enough to meet with me every year to discuss the state of the country and the economy. However, my experience in business eventually convinced me that his formula of requiring Canadian minority ownership of companies operating in Canada was not going to work. Canada suffers from substantial diseconomies of scale in comparison with the United States. I was also convinced that with the inevitable rise of Asia and the strength of an increasingly integrated Europe, an inward-looking Canada would never succeed. I became convinced that Canada needed to meet world competition with its own economic muscle. The solution to the invasion of foreign transnationals was to create powerful international companies of our own — my ambition for CSL. I believed that our preoccupation with Canada’s internal difficulties, and our impulse to meet international competition by trying to wall it out, flirted with danger — the danger that we would lose out in the world. Indeed it was these beliefs that drove one of the themes of my first leadership run in 1990: “Nationalism without walls.”

  When you understand how closely my ambitions for CSL were tied up with these ideals, you can appreciate my reluctance to divest my ownership of the company when I became finance minister and later prime minister. CSL was not only the result of the most audacious gamble of my life, it was also the incarnation of a vision I had for Canadian business. I believed that we had to succeed globally, both individually and as a country, if we were going to survive the transformation and increasing integration of the world economy.

  My friend and close adviser, Terrie O’Leary (about whom, more later), warned me that CSL could be a political millstone, with the minister of finance’s family owning a major Canadian business. And how could I be involved with a company that had ships flying foreign flags? The answer is that if Canadians are going to succeed in an international business such as shipping, they will have to be involved with foreign markets and foreign unions. Our ships always had the highest safety standards. But if you are operating in the coastal waters off Australia or Indonesia, it makes no sense to be a Canadian-flagged ship. The majority of CSL’s ships do fly the Canadian flag and the Canadian fleet is growing. Most CSL employees are Canadians; the company has its headquarters in Montreal and is taxable right here in Canada. Maybe some people are not bothered when Canadian companies are bought up by foreign interests. I’d rather see us doing the buying than the
selling. I understood exactly what Terrie was telling me, but selling CSL meant betraying the vision that had guided me from the beginning — and probably meant another Canadian asset eventually falling into foreign hands. In the end, just before I became prime minister, I transferred the remaining vestiges of ownership to my sons.

  The disappearances of Canadian head offices as major Canadian companies are taken over by their international competitors has led to an important debate. I am among those who feel that these losses have deep consequences, ranging from decreased support for Canadian universities to the reduced exercise of Canadian sovereignty.

  For example, when Doug Young, the minister of transport, masterfully piloted through the privatization of Canadian National Railway (CNR), as minister of finance I insisted that the legislation ensure, as much as possible, that the company would remain Canadian, with a head office based in Canada.

  For the same reason I resisted the pressure to free Petro-Canada from similar restrictions when the government sold its remaining shares in the company.

  On the other hand, as anyone who has watched the French or the Americans at work knows very well, it is not always necessary to proceed by legislation. I played that game too. Once, when Alberta Energy and PanCanadian Energy were contemplating the merger that eventually created EnCana, the two CEOs, Gwyn Morgan and David O’Brien, came to see the natural resources minister, Ralph Goodale, and me. They told us of their fear that a foreign bid was possible that could prevent a new Canadian energy giant being created. They felt if I expressed my support for the merger this might send an important signal that might be picked up where it would do the most good.

  As it happened, I had an interview scheduled with David Crane of the Toronto Star, whose views on this general issue were well known. The interview took place soon thereafter, and the signal was sent, and duly published.

  Whether it was received, we’ll never know, but the merger of the two Canadian companies took place and EnCana was born. I hope it stays Canadian.