31 July 2009

Desmarias Dynasty

Bloomberg, Lisa Kassenaar, 31 July 2009

Deep among the pine forests of rural Quebec lies a private estate the size of Manhattan, a refuge where French President Nicolas Sarkozy has gone to relax.

Former U. S. presidents George H. W. Bush and Bill Clinton have played golf here, on 18 meticulously groomed holes with a bright-yellow cottage for respite at the 13th tee. Pheasant shoots are orchestrated from the hunting lodge; opera is performed in the music pavilion. An original of Auguste Rodin's The Thinker and a statue of Thomas Jefferson adorn the rough, granite hills.

At the heart of the property is a grand residence surrounded by formal gardens called Cherlieu -- which means beloved place -- that's modeled on a 16th-century Palladian villa. This is the home of Paul Desmarais Sr., a white-haired, Canadian billionaire whose obscurity outside Quebec masks his family's vast connections and influence in global business and politics.

"They keep a very low profile," says Brian Mulroney, who met Mr. Desmarais in 1965 and, as Canada's prime minister from 1984 to 1993, introduced him to president Ronald Reagan and Bush. "That's the way they like it."

Mr. Desmarais, 82, started out with a backwoods Ontario bus line in 1951. Now, he and his family control Power Corporation of Canada, a holding company headquartered in an unmarked, eight-story building on Montreal's leafy Victoria Square. Paul Sr.'s sons, Paul Jr., 54, and Andre, 52, are co-chief executives. Together, the brothers govern a labyrinthine business empire that extends from Denver to Geneva to Hong Kong, with seats on 38 related corporate boards.

Power Corp. owns 66% of Power Financial Corp., a web of North American insurance and asset management companies with 2008 revenue of $36.5-billion. In 2007, the Desmarais bought Putnam Investments, a once mighty, Bostonbased mutual fund company that had been wounded by a trading scandal and weak fund performance.

The US$3.9-billion deal closed two months before the Standard & Poor's 500 Index peaked in October 2007. Power Financial's biggest challenge is to make good on plans to renovate Putnam into a flagship for U. S. expansion, after the mutual fund manager's assets were almost halved by the 2008 plunge in global markets.

In Europe, the Desmarais have been partners with Albert Frere, one of Belgium's richest men, for almost two decades. Together, they hold stakes in Total SA, Europe's third-biggest oil and gas company, based in Courbevoie, France; Paris-based Lafarge SA, the world's biggest cement maker; and Paris-based GDF Suez SA, the world's second-biggest utility. Paul Desmarais Jr. is a director of all three.

In China, the Desmarais own 4.3% of Hong Kong-based Citic Pacific Ltd., a steel, mining and real estate development company with a market value of US$7.2-billion as of July 13. Andre Desmarais joined the board in 1997. His father first ventured into China in the 1970s.

"Power Corp. is like an iceberg -- large and largely invisible," says David Beatty, a professor of strategic management at the University of Toronto.

Those who bet on Power Corp. in the 15 years from 1993 to 2008 earned slightly more than investors in Omaha, Neb.-based Berkshire Hathaway, according to data compiled by Bloomberg. Power Corp.'s average annual return in the period, including reinvested dividends, was 14.5%. Berkshire, which pays no dividend, returned an average of 14.1%.

The Desmarais also run a US$1.6-billion, Paris-based private equity firm called Sagard Private Equity Partners. Investors include companies managed by the Frere family; Bernard Arnault, CEO of luxury goods giant LVMH Moet Hennessy Louis Vuitton SA; and Laurent Dassault of the French aviation family, who's on Power Corp.'s board.

The unit is named for Sagard, Que., a French Canadian hamlet of 260 people that's about 480 kilometres from Montreal and adjacent to Mr. Desmarais's 6,070-hectare estate.

Four years ago, Paul Sr. built the villagers a yellow, wooden Roman Catholic church. In December, he attended Christmas services there with the maids, cooks and gardeners who work on his property.

Some visitors to the estate arrive by helicopter. They come for quiet weekends or for enormous costume parties. Cirque de Soleil has performed there. Guests have included King Juan Carlos of Spain and assorted National Hockey League stars.

"They rank with the best and most generous hosts in the world," says Mr. Mulroney, 70, in an interview the morning after a four-day visit to Sagard. "The only thing they don't do is tuck you in at night."

Paul Sr. also owns a home in Palm Beach, Fla., and another in New York. He was Canada's eighth-richest man in 2008, worth $4.1-billion, according to Canadian Business magazine. That was a slide from fourth in 2007 -- partly reflecting a plunge of 44% in the shares of Power Corp. as the global economy shuddered. Profit fell 41% to $868-million in 2008, the lowest amount since 2002.

At Power Financial, where shares declined 44% last year, net income dropped 35% to $1.34-billion, hurt by lower fee income from its prime holding, Winnipeg-based insurance firm Great-West Lifeco Inc., and $983-million in writedowns and other costs related to Putnam.

Power Corp. and Power Financial's stocks, which trade in Toronto, have rebounded in 2009. Power Corp. stock traded at $29.53 this week, up 26.4% for the year. Power Financial was at $29.98, up 21%.

The family's mystique is fed by its policy of avoiding the press. "No one really knows the full extent of their power," says John Aiken, an analyst at Dundee Securities Corp. in Toronto who covers Canadian banks and insurers. "They are an enigma, and I think they like perpetuating that." The father and sons all declined to comment for this story.

Like Berkshire Hathaway, Power Corp. relies on the insurance business for steady returns. Power Financial's core companies have been built up with numerous small acquisitions. The Desmarais keep cash high and borrowing low. Power Corp. had $5.3-billion in cash on its balance sheet at the end of 2008 and just $6.4-billion in long-term debt, according to Bloomberg data.

Power Corp.'s dividend payout in 2008 was $1.11 a share, up from 91¢ in 2007. That put the Desmarais' dividend cheque at more than $130-million. Paul Sr., directly and through holding companies, controls 48.6 million participating preferred shares of Power Corp., which carry 10 votes each. He also holds 72 million common shares, according to the company.

He doesn't collect dividends from Power Corp.'s other publicly traded units: Power Financial; Great-West; IGM Financial Inc., Canada's biggest mutual fund company; and Geneva-based Pargesa Holding SA, home of Power's European investments.

Power Financial CEO Jeffry Orr sits for an interview in a third floor boardroom of Power Corp.'s Montreal head office. The walls are lined with paintings by Jean-Paul Riopelle, a Quebec-born abstract expressionist. Elsewhere in the building is a collection of 18th-century neoclassical French antiques and a filing cabinet said to have been used by Talleyrand, Napoleon's foreign minister.

While earnings declined in 2008, Power Financial's $36.5-billion in revenue represented a jump of 27%, as receipts from Europe doubled, the company reported. "Our fundamental strategy hasn't changed," Mr. Orr says. He aims to grab market share in life insurance, retirement products and asset management as millions of households in North America and Europe, hurt by falling home and equity prices, set more money aside. "They are going to need to save," he says.

The brothers, who took over as co-CEOs in 1996, go into deep detail at dozens of board meetings a year, Mr. Orr says. "They're very active shareholders with active oversight, but they aren't running the businesses themselves," he says. "It's a very fine line."

Paul Jr. is Power Corp.'s chairman; Andre is deputy chairman and president. The father's only official title is chairman of Power Corp.'s executive committee.

A third generation is in training. Paul Desmarais III, 27, is a banker in the special situations group at Goldman Sachs Group Inc. in New York. His brother Nicolas, 23, has worked at consulting firm Bain & Co. in San Francisco. Both are members of Young Canadians in Finance, which sponsored discussions at a Montreal conference.

Paul Sr., in his ninth decade, now spends most of his time on his estate. He helped design the Sagard mansion, which was finished in 2003. The library is filled with architecture books, says Tom McBroom, the Toronto golf course designer who spent six years working with Desmarais on the meandering loop of fairways and greens strung out through the woods.

"I would stay over, and he would be up late at night in his housecoat going over the plans for the house," Mr. Mc-Broom says. Sometimes in the evenings, he says, Paul Sr. and Jacqueline would sit and talk about the old days -- when they had no high-powered friends and Paul, to save money, would drive one of his buses.

Yet the dynasty was already in the making. Sitting in the back as the bus bumped along were Paul Jr. and Andre, who would grow up to inherit their parents' business empire.

Power Corp. and the Desmarias Family, 25 May 2006