By Jack Danylchuk -- Discovery Air has made headlines for buying Air Tindi, Great Slave Helicopters and Discovery Mining Services. Then, for getting a $34-million bailout from the NWT government. The man behind it all, David Taylor, has now been forced out of the company he created. But some observers say it’s the start of something great.
Every time Alex Arychuk walks out the front door of his home in Yellowknife’s Old Town, he comes face to face with the bright pink neon marquee of Air Tindi, the aviation company he built and ran with his brother Peter and their families for 20 years. The irony weighs heavily on the family patriarch: He’s no longer welcome at the company with which he is so closely associated.
In 2006, the Arychuks sold their beloved company for $20-million to London, Ont.-based Discovery Air. The plan, developed with Discovery’s CEO, David Taylor, all but guaranteed the Arychuk’s could run the company for as long as they wished. Alex secured his position with 20 million shares of Discovery and a seat on the board.
But all that came crashing down last February when changes at Discovery, forced by other shareholders and partners, pushed him out. “It all started when we went into some strategic planning,” says Arychuk. “We did a poor presentation. The business plan was incomplete and Taylor put us in our place. The current people in charge took offence. I supported Dave Taylor who they got rid of and then they proceeded to get rid of me.” Arychuk found himself relegated to the sidelines, then shown the door. Cautioned by his lawyer against breaching Discovery’s confidentiality rules and jeopardizing the chance of redress through the courts, Arychuk is guarded in his comments. But he is willing to say that he traced the source of his troubles to a disagreement between Taylor – now the ex-CEO – and other senior officers at Discovery Air. “It was supposed to be a better place to play,” he says. “The intention was never for me to be sidelined.”
The first public sign of discord at Discovery surfaced in April 2008, during an hour-long conference call that became a hard-nosed inquiry into the future of the fledgling aviation company, and a prelude to the power play that ousted Taylor and his slate of directors, including Arychuk. For investors and analysts who dialed in that day, Taylor and two Discovery executives, chief financial officer Rich Jankur and chief operating officer Sean Clarke, described a company going through a bumpy patch. A slow fire season had cut into income from Hicks & Lawrence (a subsidiary that provides forest-fire-fighting services in Ontario and Quebec), and poor weather had delayed revenue from Top Aces, which provides fighter-pilot training for the federal government. Still, the prevailing mood was one of optimism: The turbulence was temporary and Discovery Air would soon right itself.
A banker with a passion for aviation, Taylor says he took inspiration for the form and shape of Discovery Air from investment guru Warren Buffett, assembling the company from subsidiaries with blue-ribbon clients, mostly government and mineral exploration companies. He launched Discovery in 2005 with the purchase of Hicks & Lawrence. He swooped down on Air Tindi and Great Slave Helicopters in 2006, added Top Aces in 2007, and Discovery Mining in 2008.
He left the management teams at the subsidiaries in place, and Discovery Air became the banker and public interface, managing investor relations, accounting, legal services, and human resources for the subsidiaries while scouting more acquisitions. Despite the discomfort of some investors with further dilution of share values, Taylor said he intended to make one major acquisition a year.
On that April day, Taylor told his audience of stock analysts that Discovery Air was expecting to grow “organically” through new business for its Northern subsidiaries. Air Tindi was anchored with contracts for medical services and crew rotations for the Diavik diamond mine. Great Slave Helicopter lease rates were due to rise and the rotary wing subsidiary was looking ahead to a busy and profitable year. Rising fuel costs were not a problem; those would flow through to customers.
But the hard-bitten analysts were less sanguine. A year earlier, they had been enthusiastic boosters of Discovery, but after watching the value of the company’s shares plummet 40 per cent, they were in no mood for platitudes. Two lines of questioning were pursued with vigour: Would Discovery Air continue to grow through acquisitions; and how long did Taylor plan to divide his time and energy between Discovery Air and the Pacific & Western Bank of Canada, of which he was also president and CEO?
Taylor confessed he was torn between managing the bank and Discovery Air, a company he created and built. If things played out the way he intended, he would announce a decision about his future in a year. Until then, he wasn’t saying which way he was leaning, or exactly how much time he was devoting to Discovery Air for his $100,000-ayear management fee.
Since its inception, Discovery’s shares had risen from five cents to $1.49, a “remarkable” achievement, Taylor boasted to the callers. But the questions became more pointed. What was Discovery’s board doing for its fees, and why did the bank occupy five of the 10 director seats, when it held less than 10 per cent of the shares and had diminished its financial involvement in the company. Day-to-day operations were being financed with a $10-million line of credit from the Royal Bank of Canada, and GE Capital held most of the company’s longterm debt. However, Pacific & Western still held a note for $33-million – cash that had been used to buy Top Aces.
Taylor defended the makeup of the board, which he credited with “impressive execution of the new model in the aviation industry that has resulted in massive increase in value.” As Discovery evolved, there would be fewer shared directors with Pacific & Western. A committee had been struck to look at board composition and requirements, Taylor said, but “it will be an evolutionary process. Board members retain wisdom and knowledge. We must be careful to preserve that.”
Mark McQueen, president of Wellington Capital Markets, asserted that the relevant corporate knowledge was retained by the management teams of the subsidiaries, who, he noted, were also “huge” shareholders in Discovery, and that much of the goodwill (the value of a company that comes from established reputation) was attached to them.
“The fact that the share price is down 40 per cent in eight months is really the proof that’s in the pudding,” McQueen said. “I’m not sure we should pat ourselves on the back for increasing book value by more than 30 times when more than half of that comes from goodwill.”
Audibly nonplussed by the exchange, Taylor ended the call on that contentious note, and invited everyone to the annual shareholders meeting on June 17.
In mid-May, Discovery circulated notice of the annual meeting, and put forth a slate of directors that added two new members, Fred Carmichael, then president of the Inuvik, NWT-based Gwich’in Tribal Council, and Brian Semkowski, president of a London- based investment company. Buoyed by first quarter results that showed a marked improvement in Discovery’s fortunes and forecast growth for the Northern division of 15 per cent in 2009, Taylor had every reason to be confident as he headed into the annual meeting at the Toronto Stock Exchange. But if he believed his critics were mollified, he was wrong.
Taylor had set the stage for a shareholder revolt when he brought new companies into the fold with a combination of cash and stock. Adam Bembridge and Ian Campbell of Great Slave Helicopters held almost 40 million shares in Discovery between them. Top Aces partners got 20 million shares when they joined the company. All withheld their support for Taylor’s slate, signal ing the beginning of the end for Taylor and Arychuk. After the meeting, a delegation representing a majority of Discovery’s shareholders told the board they had something different in mind.
The first shoe dropped July 25, 2008 when Taylor announced that Gil Bennett, a former chairman of Canadian Tire Corp. with a broad background in aviation, would join the board and serve as vice-chairman. To make room, Alex Arychuk would “retire.” The second dropped August 8. Taylor announced a “restructuring” of the board: the appointment of three new directors and the “retirement” of most of the slate he had put forward at the annual meeting.
Discovery Air had “completed its previously stated goal of increasing independence on the Board,” read the official announcement, describing Taylor as the immediate past chairman. “All but one of the Company’s directors are now considered to be fully independent.” The new board sacked Taylor in September and replaced him as president and CEO with former CF-18 fighter pilot David Jennings, a founding partner of Top Aces.
Ian McLean resigned from the Discovery board in protest. Bound by confidentiality rules from discussing or disclosing what happened at the meeting, or behind the scenes, McLean says only that he was “at odds with the direction that the board was taking. I couldn’t get behind that.”
A 25-year member of the air force, a former fighter pilot and commanding officer of the Snowbirds, and in civilian life the president of Cardinal Couriers, McLean says, “I made a career in leadership and management in the aviation game, and I thought someone of my calibre and expertise resigning should make a clear public statement about my arguments to the board.”
Contemplating the changes in the company he built, David Taylor is incredulous. “As a shareholder, I say, ‘Holy smoke, what a catastrophe,’” he says. “I’ve seen my shares go from a high of $2.40 down to 10 or 15 cents. And rumour has it in Yellowknife that Alex Arychuk and Sheila were fired and God, you fire the people who created the company, wonderful people who I expected to remain at the helm forever, icons of the aviation industry, it’s just incredible.”
No more credible to Taylor is the plan to move Discovery Air’s corporate office from London to Yellowknife. The corporate office was in southern Ontario for the “proximity to Bay Street,” he says, “where a public company has access to the brokers, analysts, accountants and lawyers that are necessary for a public company and are next to impossible to find in Yellowknife.”
But relocation was part of the deal with the territorial government’s Opportunities Fund – a pool of capital created with money from the federal immigrant investor program – for $34-million in new financing. Discovery Air had borrowed $35-million from Pacific & Western Bank to buy Top Aces and the loan was due. In a tight capital market, the Opportunities Fund was a lifesaver. Without it, Discovery’s new management team might have been stuck with Pacific & Western, which could be expected to insist on board representation. The fund’s predecessors, the Aurora Funds, were familiar sources of capital for Air Tindi and Great Slave Helicopters, who had used it so often that in government circles it was jokingly referred to as the “airplane fund.”
Cam Doerksen, an analyst with Versant Partners of Montreal who also sat in on the pivotal conference call, says the changes at Discovery were triggered by “disagreements that began to emerge among the company insiders. Individual managers of the companies were significant shareholders so they had some ability to change the board of directors.
“[Taylor] had a vision of Discovery as an investment company and of operating the businesses independently and maybe at some point selling them. The new philosophy is more to integrate companies that still operate as stand-alone businesses. There are opportunities to work together and pursue business opportunities. In my mind, that’s a better model.”
In Doerkesen’s assessment, “the new directors are a pretty solid group. Overall, I’m encouraged by the direction the company wants to go. Still, in this environment, they face significant issues that are beyond their control.”
Writing on his blog, Mark McQueen noted that Discovery stock “has risen on the news of the CEO change and the quarterly results. For my money, Mr. Taylor was headed for the exits when he compared himself to Warren Buffett. As we all know, the Investment Gods created just one of those.”
McQueen also praised the choice of Jennings as Taylor’s successor. “We’ve done business with him and he’s a first rate fellow on every score. Things are looking bright at the company.”
At 21, Jennings was the youngest ever CF-18 fighter pilot in the Canadian Forces. He formed Top Aces with two other retired Top Gun pilots and built it into a $35-million a year company. Now 38, he is tasked with guiding a $150-million a year aviation conglomerate through tough economic times. He will be a full-time CEO but, like Taylor, he won’t make the move with Discovery to Yellowknife.
Addressing the changes at Discovery, Jennings said it wasn’t his decision. “That was how it had to be. A lot of people had a say, there were a lot of forces at play. The result was that it did happen quickly. I think that was a good thing. The board is now quite a strong one and completely independent. They have experience with public companies as officers and strong backgrounds in aviation and finance.”
Jennings subscribes fully to Taylor’s original concept for Discovery Air of pulling together experts in specialty aviation services. “It’s really interesting where you have a company like Top Aces run by exmilitary people and companies like Great Slave Helicopters and Air Tindi with folks who fly in the Far North under extreme conditions,” he says. “I still believe that by combining the skills and good things from across those companies a lot of value can be created.”
There was no conference call with Discovery executives and investment analysts when the annual report for 2008 was released in May. Discovery recorded a $3-million profit, down by more than half from the previous year, and recorded a one-time book value loss of $133.6-million against Great Slave Helicopters and Air Tindi.
Wade MacBain, director of investor relations, says the auditor’s annual review prompted the write-down. “The company showed $1.54 book value attributed to goodwill, and the market values the shares at 20 cents. The auditors said, ‘We can’t give you a market value at this level based on goodwill,’ so it was written down.”
“Right now our outlook is mixed,” MacBain says. “Top Aces is solid, but we don’t have a really good handle on what the North will bring us this year. The number of helicopters flying is down to 50 from 75. Air Tindi is a little steadier with the air ambulance contract and Diavik. Tourism will be down and there will be fewer charters into the mines.”
The annual report confirmed that the new CEO and board of directors have made a course correction. The freewheeling days of building through acquisition are over, and for the foreseeable future, Discovery Air will hunker down, cut costs and wait out the recession.
“It’s just a new way of doing business,” Peter Arychuk says, as he contemplates the changes to Discovery Air and its subsidiaries over the past year. He doesn’t know exactly what caused his brother to be pushed out, but put it down to “a disagreement at the top” and doesn’t believe it has had any effect on the extended Arychuk family.
“I don’t know what happened, that’s between him and Discovery Air. We look after the day-to-day stuff,” he says. The successor to his brother as president of Air Tindi, his goal “is to keep our people employed, our planes flying and be a profitable business for the shareholders.”
