Power Corp. of Canada founder Paul Desmarais died in 2013. His two sons buried a part of their father’s business legacy on Friday by letting go of a strategy that had lost its allure to investors.
In a move that was years in the making, Power Corp. co-CEOs Paul Desmarais Jr. and André Desmarais announced plans to merge their company with publicly traded subsidiary Power Financial Corp., then step down as executives. One of Canada’s wealthiest families is shifting from the approach that made them rich. The clan is betting its future on a more focused financial-services company and on a CEO whose last name isn’t Desmarais.
It’s the right thing to do. It ought to translate into billions of dollars in wealth creation, as Power Corp.'s shares stop trading at a huge discount and begin to more closely reflect the value of the businesses it controls. But make no mistake, this was a tough call for the Desmarais family.
Like a number of large, Canadian, family-controlled companies – including Rogers Communications Inc. and Bombardier Inc. – the culture of Power Corp. reflects the legacy of a dynamic entrepreneur whose long shadow still influences decisions. Paul Desmarais bought a struggling Sudbury bus business for a dollar in 1951. Over five decades, he turned it into a sprawling holding company, with stakes in railways, electrical utilities, pulp and paper and insurance.
In the 1980s, when Power Corp.'s tentacles reached into a myriad of sectors and to China and Europe, it made sense to spin off Power Financial as a separate entity, focused on acquiring asset management firms, including mutual-fund manager IGM Financial Inc. (formerly known as Investors Group) and insurer Great-West Lifeco Inc.
Since the 1980s, Power Corp. has shed the bulk of its industrial holdings, including a well-timed exit from pulp and paper. Ultimately, the Desmarais clan ended up with two family-controlled, publicly-traded conglomerates with similar holdings. Power Financial now represents 79 per cent of the parent company’s net asset value. Conglomerates went out of fashion with bell bottoms. For years, institutional investors have warned the Desmarais brothers that the structure was overly complex.
Investor concerns weighed heavily on Power Corp.'s stock price. Over the past decade, its shares traded at an 18.6-per-cent discount to the underlying value of its assets, according to a report in early November from analyst Geoffrey Kwan at RBC Capital Markets. That discount translates into approximately $3-billion of lost shareholder value. Mr. Kwan said at the time that the discount would continue in the “absence of a catalyst to drive share price outperformance.”
In recent years, Power Corp.'s leaders took a number of steps to improve performance and put some life back into the share price. Great-West Life was restructured, IMG was rebranded, a U.S. insurance business was sold and an series of share buybacks played out. None of these operational and financial moves eliminated the big discount.
The true catalyst arrived on Friday. Power Corp.'s share price jumped 8 per cent, adding $1.07-billion to the company’s market capitalization. That’s partly because of a commitment to stick with financial services. A handful of investments that recall the conglomerate era – an electric-bus maker, a lighting company, and hockey-equipment manufacturer – will be sold over time.
Power Financial chief executive Jeffrey Orr, a former investment banker, will become CEO of the parent company. Combining forces will save Power Corp. $50-million a year – a chunk of the cost savings comes from paying just one CEO, rather than three.
The proposed transaction needs to be approved by Power Financial minority shareholders, and the parent company made the deal easier to swallow by announcing plans to increase its common share dividend by 10 per cent and buy back up to 10 per cent of its shares. But in a presentation to investors Friday, Mr. Orr said the chief virtue of the deal is that it makes Power Corp. “easier to understand and value.”
A third generation of Desmarais family members is climbing the management ranks at Power Corp. One of them may someday take the reins. They will inherit a company that is very different from what Paul Sr. envisioned. Power Corp. was created as a diverse group of holdings to minimize the risks that come with exposure to any one sector. Going forward, the Desmarais family’s fortune will rest on their ability to run an asset-management business.