Wednesday, May 17, 2006

Power Corp's Newspaper Assets

The Globe and Mail, Konrad Yakabuski, 17 May 2006

Yves Michaud calls Paul Desmarais his "friend of almost 50 years." In truth, the two feisty septuagenarians have been on opposite sides of Quebec's political divide since the beginning of the Quiet Revolution. Mr. Michaud is as sovereigntist as the pope is Catholic and once founded a newspaper to counter a perceived federalist slant in the Quebec media, led by Mr. Desmarais' La Presse.

Now, as Quebec's most determined and entertaining activist investor, Mr. Michaud is taking on his old "friend" on behalf of minority shareholders in Power Corp. of Canada. And once again, the centre of their dispute revolves around Power's media assets, about which its financial statements disclose, well, almost nothing.

Through its 100-per-cent held Gesca Ltée subsidiary, Power owns six French-language dailies, including La Presse, the main Montreal broadsheet, and Quebec City's Le Soleil. Its newspapers have weekly circulations of more than three million copies, making it the biggest publisher in French Canada. For Quebeckers, Gesca remains the principal symbol of the Desmarais family's influence.

Mr. Desmarais' newspaper ownership has always been a touchy subject in Quebec. The National Assembly, of which Mr. Michaud was then a member, held parliamentary hearings before allowing him to buy La Presse in 1967. Premier Robert Bourassa blocked Power's first attempt to buy Le Soleil, preferring Conrad Black, who ended up selling the paper, along with two other dailies, to Power in 2000. Then Parti Québécois premier Lucien Bouchard, a Desmarais family friend, took a lot of flak from within his own party for allowing the transaction.

Why exactly has Mr. Desmarais been so keen to own print media assets in Quebec? After all, Power has always been the first to get out of so-called declining industries, from forest products to trust companies. Is Mr. Desmarais in newspapers strictly for business reasons, or has he gained control of them, regardless of the drain on or marginal contribution to Power's finances, to promote his political views? And if so, why should Power's minority shareholders have to bear the burden of the media unit's losses or, at best, its below-average returns? If the Desmarais family insists on owning the newspapers, which are a non-core component of Power's largely financial services business, why doesn't it just buy them from Power?

These questions are implicitly at the heart of Mr. Michaud's attempt to force Power to disclose Gesca's financial results. Invoking a never-before-used clause of the Canada Business Corporations Act that allows any shareholder to examine the financial statements of a subsidiary, Mr. Michaud, a colourful orator, woke the audience from its slumber at the Power annual meeting last week.

Prior to the meeting, Mr. Michaud had contacted Power to advise them of his request. Power's general counsel, Ted Johnson, did not dispute Mr. Michaud's right to view the Gesca statements, but he asked Mr. Michaud to provide a written request outlining "in what quality and to what ends" he was making the inquiry.

"I retorted on the spot that it was none of his business and that the law does not require a shareholder to specify the motives of his request," Mr. Michaud told the public meeting, comparing Mr. Johnson to Torquemada, the leader of the Spanish Inquisition.

Under the law, Power has 15 days to respond to Mr. Michaud. If it opposes his request, it must prove to a judge that opening Gesca's books would be "detrimental" to Power or its media subsidiary. Expect a legal challenge; Mr. Michaud has struck a nerve.

"If Gesca is losing money, [Power] has a duty to protect minority shareholders," Mr. Michaud said. "They say it's profitable; others say not. But one can't assume anything without seeing Gesca's statements."

Power's minority shareholders are not usually the type to complain. Partly, with reason. Although the stock has moved sideways in recent months, it has posted a 10-year annual return of 22.6 per cent.

A note to Power's financial statements breaks out the contribution to net earnings from Great-West Lifeco, IGM Financial and Parjointco, Power's European affiliate. They are all highly profitable. Everything else, which is lumped under the "other" heading is not. Power's "other" holdings, which include Gesca, its stakes in CITIC Pacific, Neurochem and other companies, contributed a loss of $103-million in 2005, a modest improvement from a loss of $123-million in 2004. But the numbers are too incomplete for shareholders to draw any conclusion about Gesca.

Power contends that, for competitive reasons, it keeps Gesca's results private. But rival Quebecor breaks out the operating results of its various media divisions, including its newspapers.

Le Soleil became a tabloid last month after years of faltering circulation.

La Presse has made gains at the expense of Quebecor's Journal de Montréal since 2001. But at what price? Power invested huge sums in a 2003 redesign. Some doubt the paper is profitable.

Mr. Michaud knows first hand how tough it is to make a buck in the newspaper business. Le Jour, the Montreal-based sovereigntist daily he co-founded in 1974, crumbled after barely two years.

After all, not every money-losing paper can count on a deep-pocketed owner who supports its cause.