AFTER FIVE YEARS ON THE SIDELINES, POWER CORP. JOINS CONRAD BLACK IN TAKING A STAKE IN SOUTHAM
AFTER FIVE YEARS ON THE SIDELINES, POWER CORP. JOINS CONRAD BLACK IN TAKING A STAKE IN SOUTHAM
About 75 leading members of the Toronto investment community gathered in the gloomy oakpanelled dining-room of the National Club on March 12. After a lunch of salad and fillet of veal, the group listened intently as the guest of honor, media magnate Conrad Black, began his presentation. He waxed enthusiastic over his most recent acquisition: a stake in Toronto-based newspaper and magazine publisher Southam Inc. Later that afternoon, salesmen from the brokerage firm that had organized the lunch, BBN James Capel, called several of the major money managers who had attended and tested their interest in a possible $100-million issue of Southam stock. The callers reported that the response was overwhelmingly positive. But just one week later, Southam abruptly changed its course. On March 19, it announced that it had concluded a so-called private placement of 13 million new shares with Montreal-based Power Corp. of Canada, which is controlled by the Desmarais family. Barry Gordon, an executive vice-president at BBN, said that although his firm lost its deal—and about $1 million in potential commission fees— Southam’s decision was understandable. “Institutional investors have capital but they don’t know how to run a business,” Gordon said. “Paul Desmarais has solid publishing experience—and he’s not exactly strapped for cash either.”
Indeed, Power’s $180-million investment in Southam marks the end of a remarkable display of corporate self-restraint. In 1989, at the peak of the market, the holding company suddenly sold its stakes in a pulp and paper company, Consolidated Bathurst Ltd. as well as, two months later, Montreal Trustco Ltd. The cash proceeds of those
sales came to $1.8 billion and, as the economic recession set in, it earned Power a significant annual investment income. It also earned Desmarais, the patrician 68-year-old company chairman, a golden reputation as a shrewd businessman. (Desmarais, who prefers a low public profile, declined to be interviewed by Maclean ’s.)
But after five years of resting on those formidable corporate laurels, industry analysts say that Desmarais and his two chosen successors, sons Paul Jr. and André, must now prove that they still have what it takes to succeed. Even though the senior Desmarais has bought Southam shares at a price close to their 52-week low, cutting a significantly better deal than Black, who paid $18.10 a share, not everyone is convinced that the Desmarais magic can help the struggling publishing company with its restructuring. Others, however, have expressed outright disappointment in his choice. Said Terrence Fisher, a vice-president with Toronto-based investment dealer Midland Walwyn Capital Inc.: “The attitude out there is, ‘We have been waiting five
years and this is it?’ It may turn out to be a big strategic investment—but that could take another three to five years to materialize.” Clearly, Desmarais does not make any investments lightly—or for the short term. According to senior Power officials, who spoke to Maclean’s on condition of anonymity, each proposed deal is scrutinized from several angles—including the target of a 15per-cent return on investment. It must be a significant percentage of a company’s out-
standing shares and include a seat on the board of directors, and it must be in a sector with which Power management is familiar. Those include publishing, financial services or pulp and paper. Above all, any transaction must conclude on friendly terms with existing management—a factor that some industry observers say cleared Power’s path into Southam. Said one Power official: “For five years, we have been told that we have missed the window of opportunity to reinvest. You have to be impervious to such pressure from Bay Street.”
Still, Power officials concede that they are exceptionally close-lipped about the company’s long-term strategic objectives. “Our strategy evolves all the time,” said one executive, “and there’s little advantage in telegraphing our punches.” Such reticence may also be based on Desmarais’s long record of thwarted deals. Starting with his earliest business venture, a Sudbury, Ont., bus service that he revived in the 1950s and eventually expanded into the Voyageur-Colonial line, Desmarais’s expansion into U.S. and western Canadian markets was blocked by rival Greyhound Bus Lines Inc.
After his $150-million bid to take over Argus Corp. was blocked by then-chairman John (Bud) McDougald in 1975, Desmarais
began to accumulate shares in Canadian Pacific Ltd. of Montreal. In 1981, both CP management and federal regulators told him to back off. He also signed a 10-year standstill agreement limiting Power’s investment in the conglomerate to 15 per cent. Later in the 1980s, Desmarais also failed in attempts to buy a long-distance service, Teleglobe Canada Inc., as well as Montreal’s largest French-language television station, TéléMétropole. Finally, after the Caisse de dépôt et placement, Quebec’s powerful provincial investment arm, blocked the merger of Power’s Consolidated Bathurst with Domtar Inc., Desmarais sold the company to Stone Container Corp. of Chicago.
After that, Desmarais retreated to Europe where, through a 69per-cent-owned subsidiary, Power Financial Corp., he focused on building a presence in the financial services sector. In Canada, the company already controlled a blue chip insurance company, Great-West Lifeco, and mutual fund manager Investors Group, both of Winnipeg. Power’s only subsequent, and still unconfirmed, foray into North America, before the Southam investment, was the talk of a deal with U.S. communications giant Time Warner Inc. last summer.
For outside investors, the challenge of understanding Power’s long-term strategic plan is further complicated by the family factor. The Desmarais family directly owns about 62 per cent of Power, and Paul Desmarais has made a deliberate attempt to structure the company so that his two sons can succeed him with minimal disruption. According to analyst Fisher: “With Power, you have to accept that the pace and the investment objectives will always be dictated by the family agenda. You have to be willing to buy into that, to trust their judgment.”
Already, the elder son, Paul, 38, has assumed responsibility for Power’s financial services investments in Europe as the chairman of Power Financial and vice-chairman of Power itself. He has moved to Paris to oversee that business, which includes a stake in a Geneva-based merchant bank, Pargesa SA, and a piece of Paris-based Banque Paribas. For his part, André, 36, oversees the company’s publishing and broadcast operations, which include the ownership of North America’s largest French-language daily newspaper, La Presse, as well as three other Quebec dailies, 18 radio stations and three television stations in Ontario and Quebec. He became president and chief operating officer of Power in 1991.
The senior Desmarais has said that he is deliberately creating two separate business and geographic spheres for his sons to avoid a potentially divisive power struggle. As well, to ease the next generation’s transition to
management of Power, Desmarais retains a full cast of experienced corporate lieutenants, including John Rae, brother of Ontario Premier Bob Rae. Among the directors of the corporation are former Ontario premier William Davis, Seagram Co. Ltd. chairman Charles Bronfman, former Ontario lieutenant governor John Aird, Senator Michael Pitfield and former chairman of Imperial Oil Ltd. Arden Haynes.
It remains to be seen, however, whether the second generation will display the same brilliance as their father in building and es-
tablishing such key business and political connections. Indeed, even a cursory glance at Desmarais’s circle reinforces the frequent criticism that the control of Canada is concentrated in the hands of a chosen few who pass major corporate assets back and forth among themselves.
Desmarais, the son of a lawyer, grew up in Sudbury with now-failed real estate developer and retailer Robert Campeau. Power controlled Campeau Corp. from 1970 until 1972, and both of Desmarais’s sons worked there before joining Power. Paul Jr. and André also worked at packaged food giant Standard Brands Ltd. when the flamboyant Ross Johnson was its Canadian president. Johnson has been on Power’s board of directors since 1982. In the 1980s, Paul Jr. also worked in the corporate finance department at investment dealer Richardson Greenshields of Canada Ltd., which is part of the corporate empire controlled by the Richardson family of Winnipeg.
On the political front, the Power ties are
equally impressive. André Desmarais is married to France Chrétien, daughter of federal Liberal Leader Jean Chrétien. During the Liberal party leadership race in 1990, Chrétien tapped Power’s John Rae as his campaign chairman. Desmarais also employed Paul Martin Jr., son of another Liberal stalwart and a one-time Liberal leadership candidate himself. Desmarais is also a friend of former Liberal prime minister Pierre Trudeau and they went to the Soviet Union together in 1986.
Just as Desmarais contributes money to all
three major political parties, he has also nurtured some powerful Progressive Conservative links. In his days as a Montreal lawyer, Prime Minister Brian Mulroney counted Power among his clients. When Mulroney ran for the leadership of the Conservative party in 1976, Desmarais contributed $10,000 to his campaign fund. Similarly, the Desmarais family donated $24,000, or 36 per cent of the public donations, to Mulroney’s Yes campaign during last year’s constitutional referendum.
It was Mulroney who originally introduced Desmarais and Black in 1978 at Black’s annual Hollinger Inc. dinner in Toronto. Three years earlier, Desmarais had unsuccessfully attempted a takeover of Argus Corp., which, by then, Black had successfully acquired. The two men struck a deal that enabled Desmarais to sell his remaining shares in Argus to Black without incurring a loss. They are also neighbors in Palm Beach, Fla.
It was in Palm Beach that Desmarais and Black negotiated the Southam deal. Before
Desmarais made his offer to Southam’s board of directors, he and Black concluded a private side agreement that establishes their voting parity on Southam’s board and sets out other conditions including first right of refusal on one another’s equity holding. Southam president William Ardell told Maclean’s that he is not threatened by the alliance between shareholders who now jointly control about 36 per cent of Southam’s stock. “They have the right to make such deals,” he said. “It has no impact on us.” Instead, he said that he welcomed the publishing expertise of both new investors. Still, he added that Power’s offer “was entirely unsolicited. It came out of the blue.”
In fact, Power’s investment in Southam is consistent with Canadian corporate history. In July, 1985, speculation raged through the financial community that either Desmarais or Black was about to purchase a controlling interest in Southam. At that time, Desmarais was flush with cash from the recent sale of his stake in Canadian Pacific, Black had just purchased his first holding in the Daily Telegraph PLC of London and Southam had no single investor with more than 10 per cent of its stock.
Rumors of a possible takeover campaign contributed to the Southam family’s defensive decision to deliver a 20-per-cent block of stock into the friendly hands of Torstar Corp. in a controversial share exchange. Last November, however, Black finally acquired Torstar’s 22.6-per-cent interest in Southam for $259 million. Donald Thain, a management professor at the University of Western Ontario in London, noted: “The curse of Canadian business is that it is dominated by such control blocks. The same assets just get passed around between them.”
Concerns about the close ties between the principal participants in the Southam deal are not widely shared—at least in business circles. In fact, Vancouver investment counsellor Milton Wong says that he welcomes the current post-recession climate of “creative disintegration” in Canadian corporate circles. Added Toronto-based money manager Ira Gluskin: “Guys like Black and Desmarais may look cozy, but the alternative is endless cousins running companies forever. They’re a huge improvement.” But unless Black and Desmarais can make their new corporate alliance work, and turn Southam around, cousins may start to look good again.
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