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Restructuring and Expanding

1981–1996

Restructuring and Expanding

1981–1989

The early 1980s proved a challenging period for Canadian business. Inflation returned, interest rates soared toward 20 per cent, and the prospects for economic recovery were far from certain. Despite its solid earnings and profits, Power Corporation decided it would be prudent to restructure its capital base and lower its long-term debt.

In April 1984, to create an integrated financial services group, Power Corporation transferred its holdings in Great-West Life, Investors Group, and Montreal Trust to a new subsidiary, Power Financial Corporation, which went public a year later. Another series of transactions in 1984 and 1985 resulted in the complete elimination of Power Corporation’s long-term debt.

The Board of Directors of Investors Group gathers at a meeting in April, 1981. From left to right: A.V. Mauro, Q.C., President, The Investors Group; R.H. Jones, Chairman, The Investors Group; A.S. Jackson, Executive Vice-President, The Investors Group; P.D. Curry, Retiring Chairman, The Investors Group; P.B. Paine, Q.C., Chairman and President of Montreal Trust; J.W. Burns, President of Power Corporation; C.E. Atchison, Director, The Investors Group; W.J. Bennett, Consultant to the Iron Ore Company of Canada; E.P. Gush, Chairman and President of Hudson Bay Mining and Smelting; G.J. Van den Berg, Director, The Investors Group; Hon. W. J. McKeag, President of McKeag Realty Limited; Paul Desmarais, Chairman and Chief Executive Officer of Power Corporation; A.G. Brown, President of A.G. Brown and Son; A.F. Knowles, Senior Vice-President of Power Corporation.

In July 1981 Power Corporation made an abrupt break with its history by selling its wholly owned CSL Group for $195 million. Gone was its long and important association with Canada Steamship Lines; gone, too, for the first time in Paul Desmarais’ business career, was the bus service. But Power’s disposition of one important company in the transportation sector allowed it to invest in another, even bigger one. Almost immediately it purchased 4.4 per cent of the voting shares of Canadian Pacific Limited, the giant rail, shipping, oil, and real estate conglomerate, and came to hold another 1.4 per cent through its subsidiaries. A 10-year standstill agreement restricted Power from buying more than 15 per cent of CP’s shares while giving it two seats on Canadian Pacific’s board and one on the executive committee.

Also in 1981, in a move that would prove of more enduring consequence, Power Corporation made a $20 million investment in Pargesa Holding SA, a Swiss corporation that owned a major interest in Banque de Paris et des Pays-Bas (Suisse). The Swiss bank had been a subsidiary of Compagnie Financière de Paris et des Pays-Bas, the French banking organization commonly known as Paribas, with which Power had enjoyed a close association for several years.
Also in 1981, in a move that would prove of more enduring consequence, Power Corporation made a $20 million investment in Pargesa Holding SA, a Swiss corporation that owned a major interest in Banque de Paris et des Pays-Bas (Suisse). The Swiss bank had been a subsidiary of Compagnie Financière de Paris et des Pays-Bas, the French banking organization commonly known as Paribas, with which Power had enjoyed a close association for several years.
Pargesa’s headquarters building in Geneva, Switzerland.

Power Corporation’s Holdings at the end of 1981

Paribas had bought 20 per cent of Power’s equity in 1978 and Power bought 2.3 per cent of Paribas in 1979. The two companies were also represented on each other’s boards. Just before the government of France moved to nationalize it in 1981, Paribas divested itself of its non-French assets and Power Corporation subsequently used its compensation payment to buy control of Pargesa Holding in alliance with several partners, not the least of whom was the Belgian entrepreneur Albert Frère. It was the start of an extraordinary partnership and a fortunate development for Power.

Paribas had bought 20 per cent of Power’s equity in 1978 and Power bought 2.3 per cent of Paribas in 1979. The two companies were also represented on each other’s boards. Just before the government of France moved to nationalize it in 1981, Paribas divested itself of its non-French assets and Power Corporation subsequently used its compensation payment to buy control of Pargesa Holding in alliance with several partners, not the least of whom was the Belgian entrepreneur Albert Frère. It was the start of an extraordinary partnership and a fortunate development for Power.

Paul Desmarais, left, and Albert Frère circa 1990.

Paul Desmarais’ Sons Join Power

Upon entering the company in leadership roles, both became closely involved in the development of the corporate strategy and the various transactions undertaken by Paul Desmarais and his management team. From the beginning as controlling shareholder, Paul Desmarais intended that his sons would one day succeed him and the family’s historic connection to Power Corporation would endure for future generations.

In those initial years, the two brothers focused their attentions on different aspects of the business. Paul Desmarais, Jr. helped found Power Financial Corporation in 1984 and became its President and Chief Operating Officer in 1986. He also oversaw Power’s European holdings. André became closely involved in forest products and communications, and was appointed President and Chief Operating Officer of Gesca in 1984, and Chairman and Chief Executive Officer of Power Broadcasting in 1988. He also provided oversight on Power’s activities in China and served as Chairman of the Canada China Business Council from 1992 to 2002.

Paul Desmarais, Jr. Photo taken in 1986
AndréDesmarais. Photo taken in 1985

In those initial years, the two brothers focused their attentions on different aspects of the business. Paul Desmarais, Jr. helped found Power Financial Corporation in 1984 and became its President and Chief Operating Officer in 1986. He also oversaw Power’s European holdings. André became closely involved in forest products and communications, and was appointed President and Chief Operating Officer of Gesca in 1984, and Chairman and Chief Executive Officer of Power Broadcasting in 1988. He also provided oversight on Power’s activities in China and served as Chairman of the Canada China Business Council from 1992 to 2002.

Paul Desmarais, Jr. Photo taken in 1986
AndréDesmarais. Photo taken in 1985
When they took over as Co-CEOs in 1996, they each brought in-depth knowledge of their respective areas to Power Corporation’s business operations. The two made for a strong team with their distinct but complementary skills and background.

Meanwhile, the early 1980s proved a difficult time for Canadian business. Inflation returned, interest rates soared towards 20 per cent, and the prospects for economic recovery were far from certain. Consolidated-Bathurst’s forest products were particularly affected, while its involvement in oil and gas resources met with mixed results. With solid assets, earnings, and profits, Power decided it would be prudent to restructure its capital base and lower its long-term debt.

With those goals in mind, and to create an integrated financial services group, Power’s major financial holdings in Great-West Life, Investors Group, Montreal Trust, and Pargesa were transferred in April 1984 to a new subsidiary, Power Financial Corporation, which went public with a new issue and a secondary offering a year later.

James (Jim) W. Burns was the first President and Chief Executive Officer of Power Financial Corporation.

It was also in 1984 that James (Jim) W. Burns became the first President and Chief Executive Officer of Power Financial. Mr. Burns laid the groundwork that allowed Power Financial to become the financial services leader it is today and the benefits of his insights still reverberate within the company. From 1971 to 1978, he was President and Chief Executive Officer of Great-West Life, and much of the company’s rapid and successful growth in Canada and in the United States was attributed to his leadership. In early 1979, Paul Desmarais appointed him President of Power Corporation; he remained Chairman of the Board of Great-West Life for many years afterward. In the early years, Power Financial was chaired by Paul Desmarais, Sr.; Frank Knowles served as Deputy Chairman.

Under the team’s leadership, Power Financial moved quickly to restructure its holdings, convert its indirect interests in Great-West Life and Montreal Trust into direct ownership and acquire the business of Investors Group’s operating subsidiaries through a new subsidiary. Subsequently, both Great-West Life and Investors Group made public offerings, partly in order to create benchmark prices that would ensure a more realistic reflection of the value of Power and Power Financial’s holdings.

Eliminating Power Corporation’s Debt

Twenty per cent of Power Financial was sold privately to the Royal Bank of Canada, the Bank of Nova Scotia, and La Caisse de dépôt et placement, the Québec government’s pension fund, for a total of $138 million. Power Corporation then sold another 3 million Power Financial shares through a secondary offering in conjunction with Power Financial’s initial public offering, reducing its position to 70 per cent. Most of the proceeds that accrued to Power were applied against its debt. Power Corporation raised another $130 million by issuing treasury shares. As well, in 1985, it sold its holding in National Bank of Canada and received more than $187 million for its stake in Canadian Pacific Limited.

The result was the complete elimination of the Corporation’s long-term debt – an objective which was to remain central to its strategy from then on.

By the time of Power Corporation’s 25th anniversary in 1950, its earnings, investments, and dividends were on the rise once more. The market capitalization of its common shares stood at $8 million. About 60 per cent of its investments, which then had a total estimated fair market value of around $32 million, still remained in its six core hydroelectric companies. Together they had an installed capacity of more than one million horsepower, produced more than four million kilowatt hours a year, and supplied electricity or gas to more than two million Canadians. They also operated 761 motor buses along 924 miles of route, 689 streetcars along 342 miles of line, and 33 electrical merchandise stores

As the economy improved and earnings increased, Power was in an enviable position to build upon its core investments and look for new ones. It continued its practice of supporting its most successful subsidiaries, maintaining or increasing its positions in Investors Group, Great-West Life, Montreal Trust, Consolidated-Bathurst, and Pargesa, often as the result of new public offerings on their parts. Indeed, directly or indirectly, Power Financial raised almost $450 million in 1986 and early 1987, more than half of which remained in liquid resources.

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Meanwhile, Power Corporation was expanding in other areas. In 1986 it acquired the Québec and Ontario radio and TV stations of Katenac Holdings Ltd. and Prades Inc., which were later gathered into a new wholly owned subsidiary called Power Broadcasting. It also made an advantageous investment in Sutter Hill Ventures, a successful venture-capital limited partnership based in California.

At the same time, Power and Consolidated-Bathurst joined as equal partners in forming Power Consolidated (China) Pulp, which then bought a 50 per cent interest in a pulp mill in Castlegar, B.C., in an alliance with the Canadian subsidiary of the China International Trust and Investment Corporation (CITIC), the international investment arm of the People’s Republic of China. This joint venture with CITIC, which represented its largest investment to that date outside China, was to be the first of many, and it marked the special, ongoing relationship that Power Corporation had established with the government of China beginning in the late 1970s.

In its annual report for 1986 Power Corporation paused to consider what it had accomplished since 1967. Its assets had grown from $165 million, primarily invested in about 20 companies, to more than $3 billion, essentially invested in just two major holdings – Power Financial and Consolidated-Bathurst. Power’s earnings before extraordinary items were $136 million in 1986, as opposed to $4.6 million in 1967. Dividends had increased from 5.5¢ a share to 50¢ a share on a comparable basis, and shares had been split two-for-one in 1979, 1985, and again in 1986.

The Corporation attributed this remarkable record of performance to its philosophy of providing for the presence of strong, independent business leaders on the boards of directors of each of the corporations and for the development of executive officers and management teams who receive encouragement, support and reward from their respective boards and from the parent corporation.

Selling Consolidated Bathurst and Montreal Trust

The 1980s, which had begun with so much uncertainty, ended with an important transaction. In January 1989 Power received an unsolicited offer of $25 a share from Stone Container Acquisition Corporation for its shares of Consolidated-Bathurst. Given Power’s long and important history with Consolidated-Bathurst, the board’s decision was not easily reached. But the offer, representing two and a half times book value, was extremely attractive, and Power had concerns about the future of the pulp and paper industry, its global overcapacity, the weakening competitiveness of Canada’s fibre supply, and the continual requirements for new capital expenditures, particularly related to environmental issues. The transaction was one of the largest business deals in Canadian history up to that time; Power’s proceeds from the sale of its interest were $1.022 billion.

Two months later, in March 1989, BCE Inc., the Montréal-based parent company of Bell Canada, offered $547 million for Power Financial’s shares of Montreal Trust, which was approximately two times the carrying value of the investment. The offer was accepted, largely because of the Corporation’s ongoing reservations about the ability of mid-sized deposit-takers such as Montreal Trust to compete successfully over the long run with Canada’s enormous chartered banks.

From 1982 to 1989, Robert Gratton led Montreal Trust through a period of substantial growth and a significant improvement in its financial performance as its Chairman, President and Chief Executive Officer.

Paul Desmarais, Jr. sat on the board of Montreal Trust and worked closely with Mr. Gratton on the sale of Montreal Trust. He was able to convince Mr. Gratton to leave Montreal Trust where he was a highly valued executive and join Power Financial in 1989 as President. He became its Chief Executive Officer in 1990, at which time Paul Desmarais, Jr. was appointed Executive Chairman.

Robert Gratton, President and Chief Executive Officer of Power Financial Corporation 1990-2005

The timing of the sale of Montreal Trust to BCE was prescient as within roughly a few years of the transaction, Canada’s trust business was taken over by the country’s major banks.

The Power group’s share of pre-tax gains on these two transactions was in excess of one billion dollars, and Power Corporation itself was able to end the decade by declaring a special dividend of $1 per share to the holders of its participating preferred and subordinate voting (previously called common) shares.

From 1982 to 1989, Robert Gratton, led Montreal Trust through a period of substantial growth and a significant improvement in its financial performance as its Chairman, President and Chief Executive Officer.

Going into the 1990s, with a solid cash position and debt-free, Power Corporation was prepared to seize new opportunities, but was in no rush to do so. “We have examined a number of investment proposals,” it stated in its 1989 annual report, “but, due to the unsettled economic conditions that have existed, we have chosen not to commit a substantial amount of our funds to long-term investment at this time. We have invested our surplus funds in highly liquid money market instruments denominated principally in Canadian and United States dollars for the time being.”

The early 1990s saw the era of leveraged buyouts and while many proposals were made to Power on how its capital could be deployed, large debt structures were not consistent with the company’s investment philosophy. Power therefore stayed out of the leveraged buyout arena.

Not that there weren’t some very important initiatives undertaken during this period. By early 1990, Power Financial held 25 per cent of the equity and 24 per cent voting interest in Pargesa. Pargesa and its affiliate Groupe Bruxelles Lambert (GBL) held substantial positions in some 16 European financial, industrial, energy, and communications companies. Its equity interest in six different and diverse financial institutions represented 55 per cent of its net asset value.

During 1990, Power Financial invested an additional $176 million in Pargesa and signed an agreement with the Frère-Bourgeois group to formally link their interests by transferring their holdings in Pargesa to Parjointco N.V., of which they each owned a half, resulting in control of Pargesa by Parjointco.

That historic agreement, originally scheduled to last for 10 years, was later extended to the end of 2014. In 2012, attesting to the stability of the relationship, the agreement was again extended to 2029 with provision for possible further extension.

Shortly after the original agreement was signed, Paul Desmarais, Jr. moved with his family to Europe for several years to manage Power’s interests on a first-hand basis,  to develop the partnership with the Frère Group and participate in the restructuring of the Pargesa group. From 1982 to 1990, he was a member of the Management Committee of Pargesa; in 1991, he was appointed Executive Vice-Chairman and then Executive Chairman of the Management Committee.

Under the joint leadership of Power Financial and the Frère-Bourgeois group, Pargesa’s strategy in Europe during the 1990s mirrored Power’s strategy in Canada 20 years earlier: It sought to divest itself of secondary investments, increase its equity in a smaller number of quality, diversified companies positioned to become leaders in their respective markets, put them in the hands of capable managers, and strengthen their balance sheets to keep them growing.

The pace of divestment, consolidation, and expansion never let up during the decade. The sale of holdings by Pargesa group companies in the course of this rationalization, including all of Pargesa’s affiliates in the banking and financial services industries, produced aggregate gains of over $2 billion and left the group with substantial cash and important positions by the end of the 1990s.

Pargesa secured majority control of Imétal S.A. (subsequently renamed Imerys), the minerals and construction materials group headquartered in France. Through a series of related transactions in 1999, the Pargesa group emerged as the largest shareholder with 3.4 per cent of the shares and three seats on the board of what was to become TotalFinaElf, the fourth largest integrated petroleum company in the world, later renamed Total. Meanwhile, Pargesa’s communications assets were combined with other industry assets and later sold. In addition, by amalgamating its assets in the utility sector, Pargesa created the foundation of what would become its current investments in GDF Suez and Suez Environnement. Pargesa would see its stake in Suez Environnement reduced by future transactions; in early 2015, GDF Suez was renamed Engie.

Additionally, Power Corporation embarked on several new initiatives in the communications sector. Starting in March 1993, it invested $204 million in Southam Inc., Canada’s largest daily newspaper publisher. That investment gave Power almost 19 per cent of Southam’s outstanding common shares (later increased to 21.5 per cent), three seats on the board, and a shared voting arrangement under a separate agreement with Hollinger Inc., Southam’s other major shareholder.

Desmarais’ Sons Assume Leadership

On May 10, 1996, at the Corporation’s annual meeting in Montréal, Paul Desmarais formally stepped aside as Chairman and CEO of Power Corporation. He continued to be Chairman of the Executive Committee of the Board and the controlling shareholder. Paul Desmarais, Jr. became Chairman and Co-Chief Executive Officer, while André Desmarais became President and Co-Chief Executive Officer. They would continue to build on the approach that had contributed to Power’s success in the past: an entrepreneurial mindset, prudent risk management and a long-term perspective.

Desmarais’ Sons Assume Leadership

On May 10, 1996, at the Corporation’s annual meeting in Montréal, Paul Desmarais formally stepped aside as Chairman and CEO of Power Corporation. He continued to be Chairman of the Executive Committee of the Board and the controlling shareholder. Paul Desmarais, Jr. became Chairman and Co-Chief Executive Officer, while André Desmarais became President and Co-Chief Executive Officer. They would continue to build on the approach that had contributed to Power’s success in the past: an entrepreneurial mindset, prudent risk management and a long-term perspective.

Paul Desmarais, Jr., left, and André Desmarais.
However, long before taking over as Co-CEOs, the Desmarais brothers had initiated transformational change within Power Corporation though a number of transactions including the sale of Montreal Trust and the disposition of television, radio and newspaper assets.

The Desmarais brothers gradually built their own teams over a number of years so that when the time came for Paul Desmarais, Sr. to step away from active management of the business, the transition would be seamless.

This transition was an integral part of Paul Desmarais’ succession plan. Paul Jr. and André were viewed as the natural successors to the leadership of the Corporation. Together with Robert Gratton, President and CEO of Power Financial, they would go on to drive the operating earnings and dividends of Power Corporation and Power Financial to record levels well into the new millennium.

Two senior Power executives were instrumental in this process: Michel Plessis-Bélair with his financial acumen and P. Michael Pitfield, with his extensive experience in business, government and academia. The new approach was defined by decision making based on team consensus rather than on a centralized approach. The team also set its sights on companies that could earn and sustain leadership positions in their respective fields. These decisions would define what Power Corporation is today.

The Honourable P. Michael Pitfield was elected to the Board of Power Corporation in 1985 and served as a Director of Power Financial Corporation, Great-West Lifeco and its major subsidiaries, Investors Group and Gesca Ltée. He retired from his Vice Chairmanship and the Power Group Boards of Directors in 2003. He was then named Director Emeritus of Power Corporation, a title which he continues to hold.

Two senior Power executives were instrumental in this process: Michel Plessis-Bélair with his financial acumen and P. Michael Pitfield, with his extensive experience in business, government and academia. The new approach was defined by decision making based on team consensus rather than on a centralized approach. The team also set its sights on companies that could earn and sustain leadership positions in their respective fields. These decisions would define what Power Corporation is today.

P. Michael Pitfield
Michel Plessis Bélair
List of Officers and Directors
1925
At his final annual meeting as Chairman and Chief Executive Officer in 1996, Paul Desmarais presented to shareholders some statistics which summarized the amount of growth that had taken place since he came to Power in 1968. Corporate assets had increased from $165 million to $2.7 billion; net earnings had increased from $3 million to $209 million; and the market value of the Corporation’s shares had increased from $61 million to $2.6 billion, representing a compound annual return of 16.4 per cent.
Text of Paul Desmarais’ address to the 1996 Annual Meeting of Power Corporation, his last as Chief Executive Officer.

Even as he advised shareholders of the company’s remarkable growth, he made clear he had not acted alone. “My life at Power has been a truly extraordinary experience for my family and me. During the 28 years that I have served as Chairman and Chief Executive Officer, I have received the support of many outstanding people, some who are with us today, others who are not. All have made an exceptional contribution to the impressive story of Power. On this special occasion, I applaud our team – then and now.”

He then went on to talk about his great debt to his country:

“My profound attachment to Canada stems from the great liberty and freedom that my ancestors were able to enjoy in building their lives in a new country, the same liberty and freedom which allowed me as a young French Canadian from Northern Ontario to realize his dream in building a business in all parts of Canada and abroad.”

Divesting Southam and Share Buyback

Power and Hollinger worked together to solve the problems of Southam’s declining circulations and heavy debt, but it had become increasingly clear that the company would benefit from a major restructuring of its assets and focused shareholder leadership. After a committee of independent directors rejected a proposal designed to accomplish both objectives, the new executive team at Power took its first bold move and had the company sell its entire stake in Southam to Hollinger in 1996 for $294 million, a pre-tax gain of $75.2 million.

The proceeds were almost immediately applied toward the $326 million purchase and cancellation of 17 million Power shares held by Paribas, an anti-dilutive move resulting in a 13.5 per cent reduction in the number of Power’s outstanding participating shares. This was seen as a substantial move by the new executive teams at a time when share buybacks were not common and certainly not for such a large volume of shares, and laid the groundwork for the accelerated earnings growth in the years to come.

Power was delivering a clear message: the best use of its capital was to reinvest in itself by reducing the number of shares outstanding and strengthening its financial position.