Caisse starts reducing its stake in Quebecor Media with $1.5B sale to parent

MONTREAL – The Caisse de depot et placement du Quebec is cutting its ownership stake in Quebecor Media by 46 per cent more than a decade after they partnered to fend off an attempt by Rogers Communications to buy a Quebec-based cable service.

The pension fund manager said Wednesday it is selling 30.5 million shares in the operating arm of Quebecor Inc. (TSX:QBR.B) in a deal valued at $1.5 billion — cutting its ownership stake to 24.6 per cent from 45.3 per cent.

Under the deal, Quebecor Inc — which intends to take advantage of low interest rates to finance the shares — will increase its holdings in QMI to more than 75 per cent from less than 55 per cent.

In 2000, the Caisse did not support a bid by Rogers Communications Inc. (TSX:RCI.B) to buy Videotron and partnered with Quebecor to spend $5 billion to thwart the Toronto telecom giant’s bid. Videotron has since become a dominant force in the province through it ownership of TV stations, cable, newspapers and wireless service.

The deal announced Wednesday pegs the value of Quebecor Media at about $6 billion, representing a 20 per cent premium over what analysts had calculated for the privately-held division.

Caisse CEO Michael Sabia said the investment giant remains “convinced of Quebecor Media’s potential to create value.”

“For this reason, we are retaining a substantial stake in the company. In our view, the conditions are right to rebalance our portfolio by divesting a part of the major position we held in the media and telecom sector,” he stated.

However, the Caisse, which manages money on behalf of Quebec pension and insurance funds, could sell its remaining stake in 2019 by forcing Quebecor Media to go public or in a private transaction.

Under the deal, Quebecor will buy back some 20.3 million shares of QMI held by the Caisse for an aggregate purchase price of $1 billion, payable in cash.

Quebecor will buy back an additional 10.2 million shares by issuing to the Caisse $500 million in six-year subordinated convertible debentures, which are convertible into between 10.4 and 13 million Quebecor Inc. class B subordinate shares depending on the company’s share price at maturity.

“This transaction was driven by two partners that had been in a very solid and robust performing partnership for the last 12 years,” Quebecor president and CEO Pierre Karl Peladeau said Wednesday during a conference call.

“The time frame of the holding of the Caisse was longer than usual and…we saw there were some opportunities in the debt markets.”

The Caisse sought the advice of outside evaluators but Quebecor said it didn’t seek a fairness opinion.

Peladeau said the transaction won’t impair Quebecor Media’s financial flexibility to grow the capital intensive telecom business. But he wouldn’t say if the deal means it will be limited in the next spectrum auction to focus on Quebec and refrain from expansion in other parts of Canada.

The increased ownership stake will allow Quebecor to keep a larger share of Quebecor Media’s free cash flow as well as $20 million a year in annual dividends that have been paid to the Caisse that will offset debt interest costs.

Quebecor Media has paid out $100 million a year in dividends to its owners, including $324 million to the Caisse since 2003.

Longer term, Quebecor’s goal is to simplify its holding company structure and reduce the share price discount for the holding company, which relies almost entirely on the operations of Quebecor Media, added chief financial officer Jean-Francois Pruneau.

“It’s the first step … we believe that should be the lever to reduce the discount, so that’s essentially what we’re trying to accomplish,” he told analysts who questioned why the company didn’t instead buy back its shares.

“Sure there would have been an alternative to buy out our own stock, but long term we don’t think it would have been the best result. Access to cash flow in the long term is very important.”

Maher Yaghi of Desjardins Capital Markets described the transaction as negative.

“We believe many may question why (the Caisse) is selling part of its position in QMI at the present time. This could create negative sentiment and we suspect the stock could be under pressure until management addresses this issue,” he wrote in a report.

But Adam Shine of National Bank Financial had a more positive take on the transaction he said is the start of a long-awaited divestiture in Quebecor.

“Quebecor shares should react positively to the news, though we’d be surprised to see a 20 per cent jump in the stock, with a five to 10 per cent move more realistic,” he wrote.

He said the company’s shares have come under pressure in recent months in the face of market concerns related to expected pressure from Bell’s IPTV rollout and a weakening performance in its news media division.

Moody’s Investors Service downgraded Quebecor Media’s debt ratings by one notch because of the higher leverage ratios but put the ratings outlook as stable on forecasts of solid liquidity and free cash flow positive after 2014 as higher capital spending ends.

DBRS and Standard & Poor’s confirmed their ratings. Although QMI’s debt-to-EBITDA ratio will increase after several years of deleveraging, DBRS said higher operating income could bring the debt ratios back in line.

Quebecor, the company behind Sun Media Corp, Videotron and others, is today one of Quebec’s top five private sector employers. It has more than 12,000 employees in the province and an annual payroll in excess of $600 million.

On the Toronto Stock Exchange, its shares closed down 42 cents at $33 Wednesday.