With Power Corp. of Canada controlling Power Financial Corp., which in turn controls Great-West Lifeco Inc., some investors say there are three avenues to own Great-West.
It may be the most complicated example, but it's not the only case of a parent company and a subsidiary both trading on the Toronto Stock Exchange. In some cases, most or all of the parent's value comes from the stake it holds in the subsidiary. The remaining assets are minimal, sometimes hard to value and often poorly understood.
It can naturally lead investors to wonder why, exactly, they should buy the parent's shares, rather than participating in the better-known subsidiary instead. We're here to help, with dissections of three of the more prominent cases of parents and subsidiaries that share space on the TSX.
George Weston Ltd. used to own more than 50 per cent of Loblaw Cos., but the grocer's blockbuster deal to buy Shoppers Drug Mart pushed Weston's stake down to 45.5 per cent – of a much more valuable enterprise.
Today, the Loblaw stake represents more than $11.1-billion of Weston's $12.7-billion market capitalization. Weston also owns about $220-million of shares in Choice Properties, the real-estate investment trust created in 2013 from Loblaw stores. (W. Galen Weston, grandson of the company's founder, owns 63 per cent of the company's stock.)
That means Weston's remaining business, the bakery Weston Foods, is valued by the market at about $1.4-billion, despite $1.8-billion in revenue. The market indifference may be understandable, given declining sales volumes and profits that have prompted Weston to do a strategic assessment of the bakery business, due at year's end.
Part of the problem, suggests analyst Perry Caicco of CIBC, is that Loblaw stores are Weston Foods' major customer. That means Weston shareholders have even more exposure to Loblaw than from the stake in the grocer itself. "Weston's baking business in Canada is not generally well-positioned with discount/mass merchant players, Costco, dollar stores and ethnic grocers; and that's where the action is," he says.
Still, he believes investors are undervaluing the business, giving it a multiple of around five times its EBITDA, or earnings before interest, taxes, depreciation and amortization. He suggests eight is more appropriate.
Irene Nattel of RBC Dominion Securities makes a similar calculation, saying the implied value of Weston Foods is about $4 a Weston share, versus her valuation of $15. Her target price of $118 for Weston (versus Friday's close of $99.51) is driven primarily by her bullishness on Loblaw.
It may be harder to divine the difference between Cogeco Inc. and Cogeco Cable Inc. Cogeco owns 32 per cent of Cogeco Cable, a stake worth just over $1-billion. Cogeco also owns 13 radio stations in Quebec and a company that does advertising on public transit, but describes the businesses as "non-material assets."
And, indeed, the market capitalization of Cogeco is actually a bit smaller than the value of its Cogeco Cable stake, likely due to the fact Cogeco also carries $2.8-billion in debt.
One analyst, who declined to be named because of company policy, notes that the value in Cogeco is in the voting shares. The Cogeco Cable shares that trade on the TSX are subordinate voting shares to the ones Cogeco owns, giving Cogeco control over the cable company, despite owning just 32 per cent of the stock.
"If the Audet family ever decides to sell the company, then they could command a large premium for Cogeco shares versus Cogeco Cable shares, owing to the value of voting control. Almost all of the Audet family wealth is in Cogeco shares and not Cogeco Cable shares, so they could be motivated to negotiate a premium for Cogeco. Since they are two separate companies, there are no securities laws or coat-tail provisions that could constrain this premium."
The Desmarais family, which controls Power Corp., has a similar arrangement. Shares of Power Financial and Great-West all have one vote, but Power Corp. ultimately controls them because of its majority ownership of both. And the Desmarais family controls Power Corp. through "participating preferred shares" that have 10 votes to the common shareholders' one.
That means that investors who want to get closer to the Desmarais family's core investment have to get a little farther away from Great-West, which nonetheless drives much of the value of the two Power companies.
Power Corp. owns 65.7 per cent of Power Financial, as well as a 0.6-per-cent stake in Citic Pacific, a Hong Kong-based industrial holding company, 14.4 per cent of small TSX-listed pharmaceutical company Bellus Health, tech startup investor Square Victoria Digital Properties and other investments.
Analyst John Aiken of Barclays Capital pegs the Power Financial stake as worth $34.87 of his $38.32 estimate of Power Corp.'s net asset value, or NAV, a measure that balances its assets against its obligations.
Power Financial, in turn, owns 67.1 per cent of Great-West; 58.7 per cent of Winnipeg's IGM Financial (also listed on the TSX); and 27.8 per cent of Pargesa, a European industrial company. Mr. Aiken says the Great-West stake represents $31.30 of his $40.49 NAV estimate, with the IGM ownership worth $9.94. (Power Financial's debt more than offsets the $2.67 per share he ascribes to Pargesa.)
While Power Corp. and Power Financial are both trading below his NAVs – they closed Friday at $29.95 and $34.02, respectively – the problem is that the two Powers typically trade at a notable discount to their NAVs, Mr. Aiken says. The long-term average discounts are 14.5 per cent for Power Corp. and 10.2 per cent for Power Financial. They currently trade at an even deeper discount than those averages, however, which means a "reversion to the mean" represents upside in the range of 5 per cent to 7 per cent. (Power Corp. has the greater upside of the two, he says.)
Of course, there's always just the option of buying Great-West shares themselves. That, as in all these cases, is the option for investors who prefer simplicity to the adventure of navigating these corporate structures in the quest for added profit.
Globe app users click here for chart.
David Milstead