Thursday, May 25, 2006

Power Corp. & the Desmarais Family

  
As Power Corp.'s Paul Desmarais quietly steps out of the picture, he's giving his progeny the keys to a $3.8-billion family fortune and a legacy of political clout that will be nearly impossible to maintain

The Globe and Mail Update, Konrad Yakabuski, 26 May 2006

The Desmarais family, a London Daily Telegraph reporter explained to her readers in 2004, is "Canada's equivalent of the Rockefellers or Vanderbilts." A European can be forgiven for making such an unsatisfying analogy: Lumping the Desmarais in with America's best-known dynasties of the Industrial Age is a stretch. The Vanderbilts and Rockefellers amassed (and, in the case of the former, mostly blew) their wealth and influence in the 19th and early 20th centuries. The Desmarais are nouveaux riches by comparison. The family fortune is not even 40 years old, if one chooses the 1968 takeover of Power Corporation of Canada as paterfamilias Paul's establishment consecration.

No one knows whether the Desmarais aura will outlive—for long, at least—its 79-year-old founder. The Canadian business landscape is littered with evidence that it won't. Entrepreneurs of Paul Desmarais's brilliance, charm—and, as the French say, envergure, or breadth—do not come along every generation.

Desmarais may be merely the fifth-richest Canadian—with an estimated worth of $3.8 billion (U.S.), according to Forbes—but he is without rival as the most consequential business leader of his time. He is universally admired, even if he is not unanimously loved, by his peers. Desmarais has been personally consulted by prime ministers on every major federal economic and constitutional initiative since the 1970s. Most of the time, they've taken his advice. "If you think wealth automatically makes you hugely influential, you're wrong," says Tom d'Aquino, head of the Canadian Council of Chief Executives, of which Desmarais is a founding member. "There are many examples of wealthy people who have had zippo influence on public policy because they don't have any good ideas."

Paul Desmarais has not always gotten his way. Over the years, regulators, business rivals and/or politicians stopped him from taking over a Quebec TV network, Argus and Canadian Pacific, for instance. But what impresses everyone in the business world is Power's astonishing knack for avoiding mistakes, its anti-herd mentality and, of course, its foresight.

But is the House of Power bigger than its reigning prince? No one on Bay Street has bought the company line that Paul Sr. has given up calling the shots. After all, people don't refer to sons Paul Jr., 51, and André, 49—who've technically been running Power as co-chief executive officers since May 10, 1996—as "the boys" for nothing. Besides, Paul Sr. may have ceded his executive titles to his sons, but he did not give them ownership of his stock. His 127 million participating preferred and subordinated voting shares in Power Corp. give him 63.1% of the votes and provide him with dividends of more than $85 million annually. With all that on the line, who really believes that any one of the major deals Power has done in the past decade—from buying London Life, Canada Life and Mackenzie Financial at home, to amassing major positions of influence in European giants Total, Suez and Bertelsmann—has not started and ended with the father?

If undergoing risky heart surgery in 1997 did not seem to slow down Paul Sr., a stroke a year ago has taken its toll. He's made a remarkable recovery, friends say. But for someone who is almost 80, "remarkable" is a relative term. Doubters on the Street notwithstanding, the handover of power has indeed finally, quietly, happened. "He would not any more be the leading light in doing anything significant at Power," says Desmarais's long-time friend Peter Munk, chairman of Barrick Gold. "From a succession point of view, this recent setback came at the right time. I am exceptionally impressed by those two boys—in every respect."

That the transition has scarcely been noticed is testimony to Paul Desmarais's stature as the last of the long-term planners. Nothing is done at Power without anticipating consequences decades down the road. Acquisitions are not made to please the market. While most CEOs surrendered long ago to the terrorism of short-term investors and hedge funds, the "P" in Power also stands for patient planning.

The archetypal Canadian business icon seems to enjoy cultivating ambiguity—and fear—about what happens after they're gone. (Laurent Beaudoin and Ted Rogers, come on down.) But as far back as anyone can remember, Desmarais made it known, particularly to the hired hands who might have aspired to become more, that he was grooming his boys, and only his boys, for Power. Naturally, they've turned out to be different from one another. André is a political animal, a cocksure card who, despite the comedy act, does not suffer fools gladly. Paul Jr. is the steady, erudite type, more worldly and aristocratic in demeanour than his brother, and decidedly more interested in policy than politics. If it wasn't for the finishing of these two, Paul Desmarais might have sold out long ago. Then he could have retired with his wife, the luminous, opera-loving Jacqueline, to hunt pheasants and entertain the power elite at their 75-square-kilometre Sagard estate in Quebec's mountainous Charlevoix district. But he has stuck around to mentor the boys, if not to mediate between them. "He was very lucky," says Peter Munk. "He had two boys who were not only very eager, but who have the ability. Paul built that business with an enormous capability for networking that no one in Canadian history has ever matched. And the boys got introduced to his contacts. They were educated well, they married well. And they've behaved."

But can Desmarais's grand plan to see Paul Jr. and Andy, as the second son is known to all, run the family business as an equal partnership really work? It would be a first. The three Irving boys split the empire into autonomous business units after father K.C.'s death; Érik Péladeau didn't even challenge younger brother Pierre Karl for the crown when Papa Pierre passed on; the McCain brothers left blood on the floor before their power struggle ended in a permanent split. Even Munk, an unapologetic Desmarais partisan, is skeptical. "I have a bias against kids inheriting major businesses from their parents. It becomes a self-defeating strategy," says the mining magnate, whose own children have forged independent careers. "But I bet [Paul Jr. and André] fully intend to try to do with their own kids what their father did with them. They have been brought up in this ethos."

Even starting out from that premise, it is not easy to discern what Power, sans père, might look like. The boys shun the media more than their father ever did, and declined requests to be interviewed for this story. Even though they run a publicly traded company, they seem to believe that any discussion of corporate strategy is not a matter for public consumption. "We're not very talkative," concedes a Power insider. "We just don't feel it's constructive."

Even the boys' fans are hesitant about speaking publicly, lest they say some little thing to tick them off. Several powerful and successful people—the kind you'd think wouldn't need anyone's permission—declined requests for on-the-record interviews for this story. Most of them right off the bat; others, after checking with the Desmarais. "We seek, to the extent possible, to maintain discretion, just as the Desmarais [do], whom we are delighted to have as partners and friends," Gérald Frère, whose father, Albert Frère, is the family's key European associate, wrote in an e-mail reply. "Despite our desire to be agreeable, we regret that we cannot, in this instance, grant your request."

Paul Desmarais mingles so easily with European elites that they probably sometimes forget—even though he definitely cannot—that his character was forged not in the salons and grandes écoles of the old continent but on a rump of Precambrian rock in the Canadian woods. A franco-Ontarian, Desmarais learned his English in the pool halls of Sudbury. After earning a commerce degree in French at the University of Ottawa, he got into Toronto's Osgoode Hall Law School. But he left without graduating, returning to his hometown in 1951 to rescue a struggling family-owned bus company. He married Jacqueline Maranger, a nurse, in 1953. Paul Jr. was born in Sudbury the following year; Andy came two years later, by which time the family had relocated to Ottawa. There Desmarais took over Gatineau Bus Lines, which connected the sleepy national capital and lively Hull. It turned out to be a lucrative route, especially on boozy Saturday nights. A couple more bus company turnarounds later and Desmarais had become wealthy enough to move to Westmount with his family, which had grown to four children with the births of Louise and Sophie, in 1959 and 1962, respectively.

Within a few years, Desmarais had bought control of Power Corp., a utility owner that turned itself into an investment company after the 1962 nationalization of Quebec's hydroelectricity industry. That purchase, along with the 1967 acquisition of La Presse, signalled Paul Desmarais's arrival. Yet he didn't do it for the glory. "He always got much more pleasure going home after a major deal and telling Jackie about it than he ever did making the deal itself," says Brian Mulroney, who became a Desmarais protégé as a young Montreal lawyer-in-a-hurry in the mid-1960s. "His family shaped his personality, his ambitions and his achievements. His devotion to Jackie and the children is total."

Naturally, succession planning was on Desmarais's mind. By the 1980s, the first phase of the boys' preparation was complete, and they were ready to come in-house (see "How 'the boys' were groomed for Power," page 48). They spent the decade close by their father's side, and out of the limelight. André seemed to be getting the juicier mandates. In 1984, his father named him, at only 28, CEO of Gesca Ltée— the unit that oversaw Power's newspapers—and CEO of Power Broadcasting. The following year, Power tried to take over Télé-Métropole, the forerunner to TVA, Quebec's largest private television network. Federal regulators blocked the transaction. Power subsequently set its sights on satellite TV; however, there, too, regulators set what Power considered impossible limits on its activities, and the venture was abandoned.

Still, André seemed to be the favoured son. He accompanied his father on his frequent visits to the People's Republic of China, the elder Desmarais having sensed before most of the world that there was a sleeping capitalist giant beneath the communist veneer. "A lot of effort and money was put into building this relationship [with China] knowing that there would not be any return to the shareholders of Power for a long time," says Mulroney. "But, today, Andy is probably the best-connected Canadian operating in China." Power owns 4.6% of CITIC Pacific, a massive Hong Kong-based conglomerate that invests in power generation, aviation (it's a large shareholder in Cathay Pacific Airlines) and infrastructure proj-ects in China. When Quebec Premier Jean Charest led business leaders on a trade mission to China last fall, it was André who got the VIP treatment from state officials, not Charest.

André's other job in the 1980s was overseeing Power's controlling interest in Consolidated-Bathurst, then one of Canada's largest newsprint producers and on whose board he sat with his father-in-law, Jean Chrétien. Paul Desmarais had named Chrétien a director of Connie-B, as it was known, during his exile from Liberal politics. In one of the transactions that would cement Power's reputation as the shrewdest of investors, it sold Connie-B at the height of the economic boom in 1989 to Roger Stone for $2.6 billion, a 50% premium over the company's stock market capitalization. The following year, North America fell into its worst recession since the Depression, and newsprint prices fell like, well, a stone. At the time, everyone marvelled at Power's timing. But only now, 17 years later, can one fully appreciate it. The Eastern Canadian forest industry has never fully recovered from the early-'90s recession. Today, Abitibi-Consolidated—North America's largest newsprint producer, formed out of the mergers of Abitibi-Price, Stone-Consolidated and Donohue—has a market cap of about $2.2 billion, below the price Connie-B alone fetched in 1989.

Power also saw structural change coming to the financial services industry before many others clued in. The same year it sold Connie-B, Power unloaded its controlling stake in Montreal Trust for a 23% premium. The buyer: BCE Inc., which was pursuing an ill-fated diversification strategy. The late-1980s real-estate boom had been a bonanza for the trust industry, which specialized in commercial mortgages. But the recession and regulatory reforms that removed barriers between the bank and trust businesses doomed the trust industry to oblivion. BCE sold Montreal Trust to Scotiabank a few years later, at a loss.

Without Montreal Trust, Paul Jr., it seemed, needed to find something to do. For most of the 1980s, he had toiled as vice-president, then president, of Power Financial Corp., the unit that oversaw Power's controlling stakes in Great-West Lifeco, Investors Group and Montreal Trust. Great-West and Investors were based in Winnipeg and, with solid management teams of their own, pretty much ran themselves.

In April of 1991, Paul Sr. promoted both of his sons: André became president of Power; Paul Jr. vice-chairman. "I have complete faith in the team, which includes the boys. If I dropped dead tomorrow, the boys could handle things," Paul Sr. said. But it was clear from the job descriptions that accompanied the boys' new titles that these were not equally weighted mandates. André's responsibilities did not seem to change much. Paul Jr., on the other hand, was given a special mission: Augment the family's standing on the old continent.

Paul Desmarais Sr.'s European odyssey began in the late 1970s, when the most blue-blooded of French banks, Compagnie financière de Paribas, did a reciprocal share deal with Power. Paribas bought a small stake in Desmarais's firm; Power acquired 2.3% of Paribas, enough to earn a seat on the bank's board and an introduction into the elite quarters of French business. Paribas's headquarters, off Place Vendôme in Paris, dates to the 1790s; the chairman's office was in the same room in which Napoleon married Josephine. For Desmarais, a simple French-Canadian boy from Sudbury with a passion for the history and nobility of la mère patrie, it didn't get any better than this.

However, within a couple of years of Desmarais's ascension to the Paribas board, the Socialist François Mitterand had come to power and nationalized vast tracts of the French economy, including the bank. Desmarais teamed up with fellow Paribas director Albert Frère—another self-made multimillionaire, and, as a Belgian high-school drop-out, an outsider in Parisian society. Together, they negotiated the hiving off of the bank's Swiss unit, Pargesa, from the French state. By 1990, the two men had gained control of Pargesa through a single-purpose Dutch holding company, Parjointco. Power Financial owns one-half of Parjointco, and Frère's Compagnie Nationale à Portefeuille the other half.

The Pargesa portfolio was Desmarais's ticket to respectability among the upper echelons of European society. Mitterand made him an Officer of the French Legion of Honour for "outstanding service to the Republic." The intimate 1991 ceremony at the home of the Canadian ambassador in Paris was attended by Desmarais friends including Mulroney (by now prime minister) and Maurice Druon, a lifetime member of the Académie Française—a seal of approval that Desmarais had been accepted by the French nobility. Also in attendance: Bob Rae, then Ontario's New Democratic premier.

Arriving in Paris in 1991, Paul Jr.'s task was to oversee Power's investments, through Pargesa SA, in a number of major European corporations. Handing Paul Jr. the job of managing a portfolio so close to his heart was not only a test of his elder son's abilities but also a testament to his faith in him.

Paul Jr.'s five-year stay in Paris allowed him to develop his analytical skills, his world view and his social network. On all counts, observers say, it enabled him to establish himself as the more worthy of the heirs apparent. "Paul is more mature, more solid," says a Montreal financial executive who has worked with Power. "André seems a bit insecure, always needing to make jokes." Says another source close to Power: "The big difference in the boys' training is that Paul Jr. went to Europe, where he was able to acquire a fair degree of independence and maturity. Andy, on the other hand, has always worked closely with Paul Sr., who, of course, has made all the decisions."

As of 1991, Pargesa was a hodgepodge of investments. Aside from its 17% stake in Petrofina, Belgium's largest oil company, its holdings were in companies that were all relatively minor players in their fields. Paul Jr.'s job was to work with Albert Frère and his son Gérald, now 80 and 55, respectively, to restructure the portfolio. The mandate was classic Desmarais: Sell off the non-strategic investments and build a large enough stake in a small number of big companies so Pargesa, or its 48%-owned affiliate, Groupe Bruxelles Lambert (GBL), could wield real influence over their affairs. By the time Paul Jr. returned home to Montreal in 1996, to become co-CEO of Power, he could boast of having met his father's objectives in Europe. GBL by then held almost a quarter of Petrofina, 12% of French waste and water utility Suez-Lyonnaise des Eaux and 51.6% of Compagnie Luxembourgeoise de Télédiffusion (CLT), one of Europe's largest media companies.

Each of those investments has proven to be a springboard to even more power and influence for the Desmarais-Frère partnership. Petrofina merged with Elf Acquitaine and later Total SA to form Europe's largest oil company. GBL has a 3.8% stake in Total, and Paul Jr. sits on its board. He is also a director of Suez, which in February unveiled plans to merge with state-owned Gaz de France to form a colossal utility. GBL and Pargesa together also control 54% of French building-materials concern Imerys. And earlier this year, GBL spent about 1.3 billion euros to buy 8.1% of cement colossus Lafarge SA.

As for the CLT stake, GBL swapped it in 2001 for a 25% holding in Bertelsmann AG, the German-based media and entertainment giant that includes the Random House publishing group and 50% of the Sony BMG music company. GBL's Bertelsmann stake alone is estimated to be worth at least 5 billion euros, leading to much speculation about what the Frère and Desmarais clans plan to do with the proceeds when they cash in their Bertelsmann shares in an initial public offering expected this year.

In scouting the business landscape for opportunities for the Bertelsmann cash, Paul Jr. will tap an elite network, just as the family does at home. In Europe, he can draw on not only an impressive list of CEO friends but also the many high-powered politicians and celebrities with whom he and his wife have become acquainted in Paris. Paul Jr. maintains a residence in the French capital. When there, he socializes with Bernard Kouchner, a founder of Médecins sans frontières and a former Socialist cabinet minister, and his wife, Christine Ockrent, France's version of Diane Sawyer. In France as in North America, the Desmarais are politically catholic: Nicolas Sarkozy, the French right's leading contender in next year's presidential race, became a friend of Paul Jr.'s through former prime minister Édouard Balladur, a decades-old pal of Paul Desmarais Sr.

Luc Ferry, one of France's leading philosophers and a former education minister, is one of Paul Jr.'s more intriguing connections. Ferry is an avowed atheist—he considers philosophy the "doctrine of salvation without God." Paul Jr., for his part, remains a practising Catholic. But the two men share a passion for debating life's big questions. Paul Jr. also befriended Laval University philosopher Thomas De Koninck when the two were part of a delegation accompanying then-Governor-General Adrienne Clarkson to Germany in 2001. "We discovered we had an interest in common. And it wasn't business, because I'm not very strong in that area," says De Koninck with a laugh. At Paul Jr.'s instigation, Power donated $1 million to Laval last year to fund a philosophy chair tackling contemporary quandaries, from assisted suicide to human cloning.

At the ceremony announcing the donation, Paul Jr. confessed to being "bugged" by the "cult of the individual" at the core of modern life. Ironically, one of his closest friends in France is the man considered in that country to epitomize the cult of the individual, Bernard Arnault. At 57, Arnault is France's richest man and the world's seventh-richest, with a fortune estimated by Forbes at $21.5 billion (U.S.). He first became friends with Paul Desmarais Sr. and Albert Frère when the trio served on the Paribas board. His friendship blossomed with Paul Jr. during the latter's stint in Paris, particularly after Arnault married Québécoise pianist Hélène Mercier in 1991. Arnault was then plotting the takeovers that eventually gave him control of the world's premier luxury-goods conglomerate, the LVMH Group, purveyor of Louis Vuitton purses and Moët & Chandon champagne. The marriage last September of Arnault's daughter from his first marriage, Delphine, to Alessandro Gancia, the heir to an Italian wine empire, was attended by Spanish royalty, a couple of Rothschilds, Sarkozy and the wife of French President Jacques Chirac. But only one Canadian couple got an invite: Paul Jr. and Hélène Desmarais.

On this side of the Atlantic, an invitation to Paul Jr.'s sprawling country estate on Lac Memphrémagog in Quebec's Eastern Townships is a sign of one's initiation into the rarefied circles of the rich and powerful. As out of character as it may seem, the couple hold a country-and-western themed party there each summer, and there isn't a society wannabe within a 500-kilometre radius of Montreal who wouldn't kill to be on the guest list. If you are, you're apt to bump into actor Donald Sutherland, a neighbour. Or Oscar-winning filmmaker Denys Arcand. Or former BCE chief Jean Monty, with whom Paul Jr. is building a pro-level private golf course nearby. Or Francesco Bellini, founder of BioChem Pharma and now CEO of Neurochem, which is developing drugs to treat Alzheimer's disease. Bellini and Power are joint partners in Picchio Pharma, which owns a third of Neurochem. Bellini and Paul Jr. hunt pheasants together on Île Province, the sanctuary in Memphrémagog that they jointly own. "If they were not simple people, I would not be with them," the Italian-born Bellini says of the Desmarais. "I don't like to deal with people who think too highly of themselves. I came from a poor environment, yet I feel comfortable with them."

It is no coincidence that Paul Jr. chose to build his country estate at Memphrémagog. It puts him at a comfortable distance from his father's Domaine Laforest at Sagard, which is 500 kilometres down the St. Lawrence River from Montreal. André, on the other hand, is never far from the father. He built his summer house at Sagard.

A frequent guest at André's place is Robert Charlebois, Quebec's quintessential rock star of the psychedelic era. In the 1970s, Charlebois's music became closely associated with the nationalist movement that brought the Parti Québécois to power; as a result, he has, in recent years, taken a lot of heat from Quebec intellectuals for cavorting with such unapologetic separatist-bashers as the Desmarais. Indeed, to associate with the Desmarais in Quebec, where the family's influence over business and politics is both feared and resented by many, is to risk ostracism in certain circles. Lucien Bouchard's friendship with the family made him suspect among sovereigntists and undermined his leadership of the PQ. There is widespread sentiment in Quebec—unfounded or not—that La Presse, along with Gesca's six other French-language dailies, are house organs of the provincial Liberal Party. Questioning federalism is off limits. In the last election, La Presse, always a federal Liberal supporter while Jean Chrétien ran the party, backed Stephen Harper's Conservatives. That's not surprising, according to many Quebec commentators, considering that Liberal leader Paul Martin, a former Power employee himself, was the nemesis of André Desmarais's father-in-law when he was in power.

"To say what's written on the editorial page of La Presse represents the Desmarais's thinking would be a caricature of reality," says the paper's chief editorialist, André Pratte. "As in any newspaper, the owner sets out a framework. Within that framework, we have a large degree of freedom." Pratte voted "yes" to sovereignty in both the 1980 and 1995 referendums. He is a convert to the federalist cause, however, a prerequisite for his appointment as chief editorialist in 2001.

Pratte discovered the limits of the Desmarais's tolerance back in 1994, when, as a columnist, he was demoted for a provocative missive entitled "Everything is rotten." Quoting a reader who had called him with his gripes, Pratte wrote: "Power Corp. controls everything, everyone knows that. Chrétien, [then Quebec premier Daniel] Johnson, it's Power Corp. ...Chrétien doesn't know how to read or write, and even I speak better than him. Take a trip to Shawinigan; they elected him [MP] nine times, he was a minister; it's a ghost town." La Presse's deputy publisher at the time, Claude Masson, reportedly admitted to newsroom employees that Paul Desmarais Sr. personally intervened to demand Pratte's demotion. "When you bite the hand that feeds you, there are consequences," Masson told reporters. Pratte's union, however, stood by him, and he got his column back.

Still, the sentiments expressed in Pratte's offending column strike a nerve. For the Power-controls-everything camp, it is no coincidence that executive vice-president John Rae oversaw Chrétien's Liberal leadership challenge in 1990—and his three successful election victories as PM—all from his Power perch, and that he is now the chief strategist behind brother Bob's race for the Liberal crown.

In his 1994 column, Pratte said he felt compelled to pass on his caller's conspiracy theories about Power because "there are tons of people like that. They call reporters, they're regulars on the radio phone-in shows, they vote. And also maybe because, like every caricature, this one has a basis of truth."

If there is any truth to the mantra "Power controls everything," then the boys, André and Paul Jr., have a big reputation to live up to. Luckily for them, they can count on many of their father's most trusted advisers to guide them. Power Financial chairman Robert Gratton, chief financial officer Michel Plessis-Bélair and John Rae have worked with Paul Sr. for 24, 20 and 35 years, respectively. Should the boys ever be tempted, say, to mimic Edgar Bronfman Jr., who bet (and blew) the family's Seagram fortune on an ill-fated merger with Vivendi, they would face stiff resistance from this inner circle. For better or for worse. "The boys are conscious of their limits; they know that they need to be surrounded by seasoned advisers," says the Montreal financial executive quoted earlier. "The team, and the decision-making structure it implies, prevents Power from making mistakes. But it also stops it from taking big risks, from being entrepreneurial."

Eventually, the team, like the ownership, must face generational change. Plessis-Bélair is 64, Gratton is 62 and Rae is 60. Turnover is almost non-existent at the House of Power, but there are signs of renewal among senior management. Jeffrey Orr, 47, joined in 2001 and was named CEO of Power Financial a year ago. Also in 2005, Power recruited Daniel Friedberg, 44, from Bain & Co., and gave him a vice-president's position. And Luc Jobin, 47, swapped the CEO's job at Imperial Tobacco for an executive vice-president's post at Power. This trio may emerge as the brothers' inner cabinet.

Or is that brother's? Managing a successful succession is hard enough; a bifurcated CEO's office almost certainly makes it harder. Especially if the father is no longer around to mediate. Power insiders deny there will be problems: The boys get along famously, after all. "They don't move without being ad idem," says one.

Anyway, a family feud would be, well, so bourgeois. The aristocracy does not air its laundry in public. So even if the brothers do fight, they'll do it the way Power does everything: behind several sets of closed doors. And we'll probably never be the wiser for it.
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