HomeMy WebLinkAboutFSD-003-22Staff Report
If this information is required in an alternate accessible format, please contact the Accessibility
Coordinator at 905-623-3379 ext. 2131.
Report To: General Government Committee
Date of Meeting: January 10, 2022 Report Number: FSD-003-22
Submitted By:
Reviewed By:
File Number:
Report Subject:
Trevor Pinn, Director of Financial Services/Treasurer
Andrew C. Allison, CAO Resolution#:
By-law Number:
Obtaining Valuation of Elexicon Investment
Recommendations:
1.That Report FSD-003-22 and any related communication items, be received;
2.That Staff be directed to procure the services of a business valuator for the purposes
of determining an En Bloc Fair Market Value of the equity of Elexicon Corporation
provided that the cost is equally shared between the Town of Ajax, Town of Whitby
and the City of Belleville; and
3.That all interested parties listed in Report FSD-003-22 and any delegations be
advised of Council's decision.
Municipality of Clarington Page 2
Report FSD-003-22
Report Overview
The City of Pickering is a shareholder in Elexicon Corporation. At its meeting of October 21,
2021, the City of Pickering announced plans to divest of its investment in Elexicon. As a
shareholder, the Municipality of Clarington has the right of first refusal to purchase a pro-rata
portion of the City of Pickering's shares. The first step in determining an advisable course of
action for the Municipality of Clarington is to assess the value of Elexicon.
This Report seeks approval to single source a valuation expert and share costs with the
Town of Ajax, Town of Whitby and the City of Belleville.
1. Background
Elexicon Corporation
1.1 The Municipality of Clarington is a shareholder of Elexicon Corporation, the parent
company of Elexicon Energy and Elexicon Group. Elexicon Corporation is owned by
municipal shareholders as follows:
Municipal Shareholder % Share Ownership
Town of Ajax 21.83%
City of Belleville 9.04%
Municipality of Clarington 9.25%
City of Pickering 27.88%
Town of Whitby 32.00%
1.2 At its meeting on October 21, 2021, the Council for the City of Pickering passed
resolution #694/21 directing City of Pickering staff to undertake phase two works
(proposed divesture of its Elexicon investment) and engage Deloitte LLP.
Municipality of Clarington Page 3
Report FSD-003-22
1.3 The other shareholders have a Right of First Refusal for any offer received by Pickering
from a third party for the purchase of its shares. The other shareholders have 120 days
to buy the shares or forfeit their right. The City of Pickering has not yet delivered a
notice of an offer, so the 120 day time limit has not yet commenced.
Current Investment Returns
1.4 The following chart summarizes the return on investment of the equities held in Veridian
and Elexicon from 2017:
2017 2018 2019 2020 2021
Dividend
Revenue
$ 694,552 $ 639,200 $ 941,900 $ 1,045,949 $ 1,052,422
Share
Capital
10,546,621 10,546,621 10,546,621 10,546,621 10,546,621
Dividend
Yield
6.59% 6.06% 8.93% 9.92% 9.98%
1.5 Part of the increase in dividends from 2019 to 2021 is due to the lower interest costs on
the promissory notes. Lower interest expense increases net income, which can be
provided to equity owners through dividends. Additionally, part of the increased divide nd
would be a return to the shareholders of the companies' retained earnings, which has
accrued since inception. Dividends in the future will be based on Board of Directors
discretion and the adopted dividend policy by Elexicon. Past performance does not
guarantee future results.
Municipality of Clarington Page 4
Report FSD-003-22
1.6 The following chart summarizes the return on the promissory notes issued by Veridian
and Elexicon since 2017:
2017 2018 2019 2020 2021
Interest
Income
$407,980 $407,980 $359,738 $343,657 $343,657
Notes
Receivable
8,321,000 8,321,000 8,321,000 8,321,000 8,321,000
Return on
Investment
4.90% 4.90% 4.32% 4.13% 4.13%
1.7 Since the merger between Veridian and Whitby Hydro in 2019, the return on the
promissory notes has decreased due to a change in the interest rate. Simultaneously,
we have seen an increase in the dividend paid to shareholders. Overall, the investment
income earned has increased from $1.1mil in 2017 to $1.4mil in 2021. The following
chart shows the income the Municipality has received since 2017:
2017 2018 2019 2020 2021
Interest Revenue $407,980 $407,980 $359,738 $343,657 $343,657
Dividend Revenue $694,552 $639,200 $941,900 $1,045,949 $1,052,422
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
Investment Income from Veridian and Elexicon
Years 2017 to 2021 (Budget)
Municipality of Clarington Page 5
Report FSD-003-22
1.8 The above does not include the capital appreciation of the investment. Since its
creation, Veridian, now Elexicon, has earned income in the business which has been
reinvested to grow the company and create value. As the shares are not publicly traded,
the two ways to determine the current market value of the equity are through an offer by
a third party or through a business valuation to determine the fair market value of the
equity. The equity appreciation, capital gains would only be realized upon the sale of
shares.
2. Options to the Municipality
2.1 As a shareholder, the Municipality of Clarington can purchase shares from another
shareholder (in this case, Pickering), sell its investment in Elexicon, or do nothing.
2.2 The first step for Staff to provide sound advice to Council on its options as an Elexicon
shareholder would be to obtain an estimate of the current fair market value of the
Elexicon shares. This opinion of value would be obtained from an independent business
valuation expert.
2.3 It is crucial that a valuation expert be chosen that is independent of the previous merger
activity. This will eliminate any potential bias and ensure an objective and independent
opinion of value after the merger. Since many of the major business valuation firms had
previous involvement in the merger process, it is Staff's recommendation that Council
authorize a single source purchase for the procurement of these services.
2.4 It is proposed that Clarington would equally share the cost of the business valuation with
Ajax, Whitby and Belleville. All four municipalities share a similar interest in this
exercise, and all four would benefit from sharing in the cost. If the other shareholder
municipalities do not agree to an equal cost sharing arrangement, Staff will seek further
direction from Council.
3. Concurrence
This report has been reviewed by the Director of Legislative Services/Municipal Solicitor
who concurs with the recommendations.
4. Conclusion
It is respectfully recommended that Council provide Staff with direction to proceed to
obtain a business valuation of Elexicon to better inform the future decisions on share
transactions.
Staff Contact: Trevor Pinn, CPA, CA, Director of Financial Services/Treasurer, 905-623-3379
ext.2602 or tpinn@clarington.net.
Municipality of Clarington Page 6
Report FSD-003-22
Attachments:
Not Applicable
Interested Parties:
The following interested parties will be notified of Council's decision:
Town of Ajax
Town of Whitby
City of Belleville
Elexicon Corporation
City of Pickering