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Since Cogeco Inc. patriarch Henri Audet passed away last November, it has been fair to ask how long the cable and media company, now led by his son Louis Audet, will remain under family control. This week the Audets said they would sell a chunk of their holdings. The family insists they aren't selling more. They may believe that's true, but it will become harder for the Audets to defy the forces of gravity that eventually lead most second-generation families in the sector to sell out.
Louis Audet called the sale of 432,700 subordinated shares (worth roughly $18-million) by the family holding company – which benefits Henri Audet's widow and their five children – an "exceptional transaction" that will help with family succession planning. "All members of the Audet family … remain fully committed to continuing to pursue the work of our father," he said in a release. They also remain very much in control, maintaining a 70.8-per-cent voting bloc through their multiple voting shares.
But there is both a business and personal case for selling out. Canada is a consolidating market, and Cogeco is one of the last medium-tier holdouts. Many expect Shaw Communications to eventually sell, while last week, Lee Bragg, head of eastern Canadian player Eastlink, said the company would consider selling if regulators approve BCE Inc.'s takeover of Astral Media.
Cogeco has been a buyer, not a seller, but its track record has been uneven , including the disastrous 2006 purchase of a Portuguese cable firm. But even at home its well-performing business could face increased pressure, with Rogers Communications now owning cable systems on all three sides of Cogeco's stronghold in the Hamilton-to-Toronto corridor. It would make sense for Cogeco to sell out, or at least divest the lucrative Southern Ontario part of the business to Rogers (which already owns a sizable minority stake in Cogeco).
But set aside competitive threats and you still have a family-controlled business where the interests of all family members won't necessarily be aligned once the five siblings are in charge. Following this week's sale, the family's remaining stake is on track to pay $1.76-million in dividends per year. Split five ways that's not much. But if the family sold out, their total stake, now valued at just under $100-million, would likely fetch more than $180-million, as one analyst has suggested, or $36-million each. You could argue that by selling some shares now, the family has foregone millions of dollars' worth of premium they could have commanded in a takeover.
But then, Louis Audet has much different interests than his siblings, namely holding on to a job that has paid him, on average, more than $3-million annually over the past three years, and will continue to bolster a pension already worth more than $1-million per year. To him, his presumed share of the spoils of a sale would be nice but relatively modest given his earnings power at the family company. Thus he has relatively more incentive to maintain the status quo regardless of what offers may come in.
To be fair, the CEO told the Globe's Rita Trichur last year the family "does not define itself in monetary terms" and was "devoted to doing more than receiving dollars in bank accounts – it is not what we do."
But second-generation concerns have a way of changing the conversation at family companies once the founder is gone. For the time being, the Audets appear to be a united family. But unless the dauphin can improve on his track record – he created no shareholder value in the last five fiscal years – the tone of the family discussion will likely tilt, as it has for so many other families facing the same situation.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.
Sean Silcoff