Power Corp. proposes buyout of Power Financial as Desmarais brothers retire

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Bowing to investor pressure, the co-CEOs of investment giant Power Corp. of Canada have announced that they will step down amid an overhaul that will remove Power Financial Corp. from the Toronto Stock Exchange.

After 23 years at the helm, Paul Desmarais Jr. and André Desmarais – sons of the man who built the company – will retire from their roles. Paul, 65, and André, 63, will remain with the company as chairman and deputy chairman, respectively, of Power Corp.’s board of directors.

Jeffrey Orr, the 61-year-old president and CEO of Power Financial, will become president and CEO of Power Corp. It is the first time a non-family member will lead the company.

Power Corp. announced the executive shuffle as part of a plan that will also eliminate a tier of its holding-company structure and consolidate ownership of the group’s financial-services operating companies, which include Great-West Lifeco Inc. and IGM Financial Inc.

The Desmarais Family Trust owns 22.8 per cent of Power Corp., which in turn owns 64.0 per cent of Power Financial. Power Financial, in turn, controls Great-West and IGM, which means that there are two levels of holding companies in the corporate structure.

The restructuring is aimed at saving money, focusing the business and getting a more favourable reaction from investors who have been discounting the companies’ shares in recent years.

The two Power companies have handily outperformed the market over the 30 years since Power Financial was created, Mr. Orr said. But they’ve lagged peers over the past half decade, raising complaints from shareholders about the group’s strategy, complex structure and corporate governance practices.

“In our various meetings with investors, they would like to see a simplification of the structure, and they would like to have the companies come together,” Mr. Orr said in an investor call. ”The message has been very clear, and we’ve heard that message, and we’re taking action today.”

Mr. Orr said the restructuring will cut $50-million from holding company costs within two years, and cut an additional $15-million in annual financing expenses.

Under the terms of the transaction, Power Financial’s minority shareholders will receive 1.05 shares of Power Corp. for each share of Power Financial, a 2.2-per-cent premium over the price of Power Financial shares at Thursday’s closing value.

To help sell the deal, Power Corp. said the net asset value of Power Corp. shares – a measure that balances the value of its holdings against the debts it owes – means the consideration shareholders will receive is 11-per-cent higher than the share price of Power Financial.

Power Corp. said it plans to increase its annual dividend – subject to the reorganization going forward – to 44.75 cents a share from 40.5 cents a share. It also plans a stock buyback.

Shares were up sharply on Friday, with Power Corp. stock closing nearly 8-per-cent higher at $34.42 and Power Financial up nearly 10 per cent at $36.02.

John Hadwen, vice-president at CI Investments’ Signature Global Asset Management, says over all the deal looks “fair and sensible.”

“Analysts and investors have occasionally discussed this opportunity on and off for years so its nice to see them execute,” said Mr. Hadwen, whose firm is one of Power Corp.’s largest shareholders.

Power Corp.’s board formed a special committee and hired RBC Dominion Securities Inc. to provide a fairness opinion. RBC concluded that Power Financial shares were worth $46.50 to $55 apiece – but only if the company could be sold as a whole. Since the Desmarais family could block any such sale, a lower price was warranted, RBC said.

Power Financial has been retooling its financial-services businesses in recent years. It overhauled IGM Financial’s Investors Group to target higher net worth families, combined Great-West Life’s insurance companies under the Canada Life banner and invested in digital online portfolio manager Wealthsimple. It has also unloaded businesses with lesser growth prospects, including Great West Life’s sale earlier this year of its U.S individual life insurance and annuity business.

Power Corp. did not explicitly put any non-financial businesses on the block Friday, but said that it will “realize value … over time” from Lumenpulse, a manufacturer of LED lights; Lion Electric, a manufacturer of zero-emission vehicles; and Peak Achievement Athletics, the maker of Bauer and Easton sporting goods.

Power Corp. also said it would retain its part ownership in European asset manager Pargesa Holding SA, which owns stakes in many non-financial businesses.

The two grandsons of the company’s founder – Paul Desmarais III and André’s son, Olivier, are both senior vice-presidents of Power Corp. The two cousins, both 37, have been seen by many as the next generation to succeed their fathers. In an interview, Mr. Orr said their titles and responsibilities did not change as part of Friday’s announcement, which did not mention them.