BUSINESS

A TROUBLED HERO

MICHEL GAUCHER, A SYMBOL OF QUEBEC BUSINESS CONFIDENCE, IS STRUGGLING WITH MASSIVE DEBTS

DAN BURKE July 23 1990
BUSINESS

A TROUBLED HERO

MICHEL GAUCHER, A SYMBOL OF QUEBEC BUSINESS CONFIDENCE, IS STRUGGLING WITH MASSIVE DEBTS

DAN BURKE July 23 1990

A TROUBLED HERO

BUSINESS

MICHEL GAUCHER, A SYMBOL OF QUEBEC BUSINESS CONFIDENCE, IS STRUGGLING WITH MASSIVE DEBTS

He quickly became a symbol of Quebec’s new entrepreneurial and nationalist spirit. Last August, Michel Gaucher, the ambitious president of Socanav Inc., a Montreal shipping company with annual revenues of just $141 million, moved into the national spotlight when Socanav won a $1.3-billion takeover battle for control of Steinberg Inc.,

Quebec’s third-largest supermarket chain. Socanav defeated a powerful EnglishCanadian rival—Oxdon Investments Inc., a partnership of Bay Street firms with extensive experience in takeg overs. But Gaucher, 46, had a o powerful partner of his own: as the province’s $38-billion o pension and auto insurance = fund, the Caisse de dépôt et £ placement du Québec, se| cured more than $1 billion in lt; loans for Gaucher. Now, lt;3 Gaucher’s status as a paragon x of the new Quebec appears to be in peril. Unless he succeeds in selling off some of Steinberg’s assets to reduce his remaining $670-million debt, the Caisse could step in and break up the 73-year-old supermarket chain, endangering thousands of jobs—and shunting Socanav off to the sidelines. “We have to reduce the debt by $250 million by the end of August,” says Marie Chantal Selvon, Socanav’s vice-president of finance. If not, she adds, “we are in a buyer’s market, and everybody smells blood.”

Gaucher’s struggles are a stinging reversal for Quebec’s increasingly confident business class along with its political allies. Everybody from Premier Robert Bourassa to Pierre I ortie, president of Steinberg competitor Provigo Inc., hailed Gaucher and former Caisse president Jean Campeau as Quebec heroes for outmanoeuvring Toronto’s Oxdon, which included Oxford Development Group Inc., Toronto investor George Mann’s Kingsbridge Capital Group Inc. and Gordon Investment Corp. Oxdon had spent two years attempting to acquire Steinberg, and if it had been successful, it planned to sell off Steinberg’s supermarket

operations to Toronto-based Loblaw Cos. Ltd. and retain only its real estate operations.

Gaucher, in turn, promised that his bid would retain more economic benefits for Quebec. In February, six months after buying Steinberg, he received a standing ovation after delivering a nationalistic speech to the Montreal Chamber of Commerce that cemented his

reputation as a leading francophone businessman. Said University of Montreal business professor Jean Marie Toulouse: “He became a very important symbol in the province.”

But now Gaucher’s critics say that his unbridled ambition has hurt Quebec business and that the Caisse allowed him to get in over his head. Says Francois Lauzon, a Steinberg union executive who supported Oxdon’s bid last August: “I am a true Québécois, but we would have been better off with Loblaw’s. If Gaucher is a reflection of the new breed of Quebec entrepreneur, then count me out.”

For his part, Gaucher is desperately trying to sell assets to reduce Socanav’s debt, which is costing the company about $65 million in annual interest charges. He has moved from his posh Socanav offices in downtown Montreal to Steinberg’s east-end distribution warehouse, where he spends 10 hours a day overseeing a cost-cutting program. “I have moved into the bowels of the operation,” he told Maclean’s last week. “We have already cut overhead by $25 million.” Gaucher also defended his asset-

reduction strategy. “We never said we could keep it whole,” he said. “The Caisse did the acquisition for business reasons and so did I.” Gaucher acknowledges, however, that the Caisse, which now owns 15 per cent of Steinberg, is taking a hard, businesslike view of his debt payment problems and that the relationship is strained. Said Gaucher: “The Caisse is not easy for anyone. They are very cold and calculating. They run with little emotion.”

At the time of the takeover, Steinberg employed 18,000 people in Quebec and 17,000 in Ontario and the United States. The new management team, led by Jean-Roch Vachon, the former president of Steinberg’s Canadian food retailing division, has already cut 200 headoffice jobs and almost 100 jobs at the M Stores Inc., a chain of 20 money-losing Quebec discount department stores.

Gaucher intends to retain Steinberg’s 100 Quebec supermarkets and its related wholesaling operations, its more than 70 Valdi Foods stores, Smitty’s Super Value Inc. (a chain of 24 Arizona grocery stores) and some of Steinberg’s smaller assets. In order to help finance the takeover, he tried to sell two of Steinberg’s largest out-of-province grocery store chains: Miracle Food Marts in Ontario and Smitty’s. But Gaucher has been unable to find a buyer who would meet his reported $300-million asking price for Smitty’s and has decided to

hang on to the chain. Be_

cause potential buyers know that Socanav is eager to sell, the prices for Smitty’s and other assets that Gaucher wants to sell are dropping quickly. Toronto-based Loblaw’s president Richard Currie, for one, says that the 68 Miracle Food Marts are worth only $175 million—between $75 million and $100 million less than Gaucher’s asking price.

One asset Gaucher had no trouble selling was Steinberg’s principal real estate division, Ivanhoe Inc., which owns 35 Quebec shopping centres.

The Caisse, eager to boost its real estate portfolio, acquired Ivanhoe from Socanav for more than $800 million last August, a purchase that had been a condition for backing Gaucher’s bid. That reduced Socanav’s debt substantially, but it still stands at more than $670 million because Socanav had past borrowings on its balance sheet and assumed Steinberg’s debts when it bought the company. The biggest portion

of that debt, $454 million, is owed to banks.

But while amputating Steinberg’s real estate arm lightened Gaucher’s debt load considerably, former Steinberg executives say that it could hurt the chain’s ability to compete. Many of Steinberg’s stores were located on property and in shopping centres it owned, giving them long-term security. Says former Steinberg president Irving Ludmer: “There was a great synergy between Steinberg’s retail operations and real estate.” t Indeed, some analysts now say that although the Caisse obtained the valuable real estate that it coveted, it may have done so to the detriment of Steinberg and its 35,000 employees. The University of Montreal’s Toulouse says that the company’s security would have been better served had the Caisse backed an earlier unsuccessful bid mounted by Ludmer and a group of Steinberg managers. In the fiscal year ended July 29, 1989, Ludmer’s last full year at the company, Steinberg earned a profit of $55 million on revenues of $4.5 billion, compared with a loss of $17 million the previous year. Adds Toulouse: “They know the business and they had some money. Gaucher wasn’t a food retailer, and he is finding out it is not a simple business.”

Desperate for cash, Gaucher has asked the union representing 12,000 of Steinberg’s supermarket workers for major contract con-

_ cessions. Still, despite the

$25-mffiion overhead reduction, Socanavlost $3.8 million on revenues of $2.3 billion during the first nine months after absorbing Steinberg.

Some analysts now say that Gaucher represents a streak of over-confidence among Quebec’s brash new breed of businessmen and that the Caisse fuelled his excessive ambition. Stephen Jarislowsky, a respected Montreal investment analyst and a former adviser to the Steinberg family, says: “Many of these people had success come too fast and believed that Lady Luck would be with them always. There has been an excessive emphasis on deals rather than effective management.” Gaucher’s troubles have sent a chill through the Quebec business community. Says Socanav’s Selvon: “This transaction was a leveraged buyout— probably the last one for a long time.” Certainly, at least Gaucher will have to temper his ambitions.

DAN BURKE in Montreal