Royal Group Technologies Ltd. has fired its founder and two other top executives following an investigation of a 1998 land transaction.
The Woodbridge, Ontario, firm terminated Chairman Vic De Zen, Chief Executive Officer Doug Dunsmuir, and Chief Financial Officer Ron Goegan on Nov. 27 for activity related to 185 acres of land in Woodbridge, just west of the company's headquarters. Royal announced the firings Nov. 29.
The next few months promise large-scale changes at North America's largest profile extruder, as interim management searches for a new CEO and CFO and the firm works to meet an April deadline to refinance its bank debt.
In the chaos, there are three wild cards: Its fired chairman still owns 80 percent of the company's voting shares; forensic accounting firm Kroll Lindquist Avey is not finished with its investigation; and, although interim managers say Royal is not for sale, some analysts believe a sale is the company's best alternative.
Analysts still question why Royal's board did not scrutinize the land deal in 1998.
``This was [related to] the biggest expansion that the company ever embarked on,'' analyst Steve Laciak with National Bank Financial in Toronto said on Royal's conference call Nov. 29. ``I'm amazed that this wasn't scrutinized back then. Are there surviving board members? I would say that they didn't do their job.''
According to Royal, a company owned by De Zen and others, including Dunsmuir, bought the land for C$20.5 million (US$13.4 million). The company then sold the land to Royal for C$27 million (US$17 million), without disclosing that it was a related-party transaction and without approval from Royal's board. Goegan facilitated the deal, according to Royal.
``The auditors should have been told,'' Royal spokesman Dick Wertheim said in a Nov. 30 telephone interview. ``There was a deception, or at least an error of omission, with respect to both the board and the auditors.''
Four board members remain from 1998, in addition to Dunsmuir and De Zen. But the company's position is that, under Royal's rules at the time, the deal was not large enough to merit special attention. The threshold for scrutinizing deals was C$60 million; since then, it has dropped to C$20 million.
Forensic accounting firm Kroll Lindquist Avey began its investigation Nov. 8, after Royal's special committee called on an expanded investigation into transactions between Royal Group and the Royal St. Kitts beach resort, a Caribbean development that is majority owned by De Zen.
De Zen, who is staying at the resort, according to a receptionist there, did not return a call seeking comment.
``We were frankly stunned by what Kroll found, and acted immediately on it,'' said James Sardo, Royal's newly appointed interim president and CEO, in a Nov. 29 conference call announcing the management changes.
``At the very least, in the unanimous opinion of the special committee, the roles played by Mr. Dunsmuir, Mr. Goegan and Mr. De Zen in these matters showed a breach of their responsibilities to the company, causing us to terminate their positions,'' Sardo said in a news release.
Robert Lamoureux will replace Goegan in the interim. Sardo and Lamoureux joined the Royal board one year ago.
Of De Zen, Dunsmuir and Goegan, none is entitled to termination severance pay, officials said.
Two tool and die employees who were original partners of De Zen's also were terminated.
As for De Zen's voting shares, officials said they have no indication from De Zen that he plans to exercise those voting shares. He would have to call a special meeting of shareholders, officials said.
``Should he decide he wants to go that route, the company does have legal remedies that we can pursue to thwart him in that effort,'' Wertheim said.
De Zen made a name for himself in North America, in the plastics industry and beyond, with his rags-to-riches story, emigrating from Italy to Canada as a tool and die maker. The sprawling headquarters complex in Woodbridge was De Zen's dream, with 14 facilities on 205 acres. Use of Royal's PVC-based building system allowed for rapid construction.
Under De Zen's management, Royal became a vertically integrated, international force in polymer-related building and construction products, ranking No. 1 for 10 consecutive years in Plastics News' sales-based survey of North American pipe, profile and tubing makers.
``It's unfortunate that some of this now overshadows what he accomplished,'' Wertheim said. ``There is absolutely no plan at this point to sell the company. There is tremendous enthusiasm throughout the company.
``[Employees] are a little stunned by what has happened. There's tremendous untapped potential in this company.''
Still, some analysts believe a sale may be the best alternative. Royal considered a sale in 2003. The four-month process resulted in no formal offer, as some believe De Zen was asking top dollar for a company that required much improvement. Dunsmuir took over as CEO at the end of 2003.
But the business needs a thorough housecleaning, several analysts said, so a timeframe on any sale would be difficult to predict. Inside the walls of an empire that plastic built was an organization that expanded too quickly and overspent. Royal continues to struggle with excess capacity.
Several analysts have said the company will have to consolidate operations in Canada, realign itself in the United States and sell underperforming units such as its window-coverings business.
Sardo shares the founder's vision that Royal's core businesses are custom profiles and siding. He wants to improve research and product development.
``There are a few areas, geographically, where custom profiles can grow in particular in the U.S.,'' he said. In siding, for instance, Royal has a miniscule market share.
``We have a low-single-digit market share in a huge market,'' he said. ``We have tremendous opportunities to grow that business. ... We need to move more capacity to the [United States] to take advantage of the rise in the Canadian dollar and to be closer to major markets. If we can improve the simplicity of the organizational structure and synergies between business units, I think we can achieve some cost advantages. I would be looking at the total cost model of the entire company. I need some time, obviously.''
Management's attempts may be affected by a cooling housing market, rising raw material costs and distractions from the auditors' investigation.
On the upside, analysts said, Royal has separated its prospects from the fate of the individuals: The committee of independent directors has improved its reputation and put itself in a position as ``honest brokers.''
``The new management that comes in will have much better credibility with customers and bankers, auditors and investors,'' said one analyst who asked not to be identified. ``They have a chance at a clean start.''
Sardo has his own pedigree in operating businesses in building and construction, having been president and chief executive officer of window manufacturer SNE Enterprises Inc. of Wausau, Wis., and president and CEO of Amre Inc., a home improvement firm focused on windows and siding.
``He is an accomplished manager who is being very careful,'' the analyst said.
Lamoureux spent 35 years at PricewaterhouseCoopers before he joined Royal's board a year ago.
Royal officials said they believe the worst is behind them. Wertheim said recent meetings with lenders were positive and constructive.
``At this point, there's no expectation or no knowledge of anything that would jeopardize the future of the company or force the company to restate financials earnings,'' he said.