Montreal’s Desmarais family is collapsing the complicated and costly dual holding company structure behind its fleet of insurance, money management and financial services operating companies as the two sons of Power Corp.’s founder step back after more than 20 years at the helm.
Power Corp. will remain public and under the control of the family following the restructuring, through which it will become the sole owner of subsidiary Power Financial.
Power Financial’s minority shareholders will receive 1.05 subordinated voting shares of Power Corp. plus $0.01 in cash for every share they own, a slight premium to Thursday’s closing price and an 11 per cent increase in net asset value, according to the company.
At the same time, Desmarais bothers Paul Jr., 65, and André, 63, are relinquishing their co-CEO roles and passing the torch to longtime trusted lieutenant Jeffrey Orr, who has been CEO of Power Financial, a step below Power Corp. in the complex corporate flow chart, since 2005. The brothers will remain chairman and deputy chairman of the board.
In an interview Friday, Orr said the brothers’ decision to retire this year came after investors had been pressing for a simplified company structure, which led to a review of strategy. The decision was made to focus on the group’s financial services businesses including Great-West Lifeco Inc., IGM Financial Inc. and Pargesa Holdings SA, along with investing platforms operated by Power Corp.
Once that strategy had been selected, it was determined that there would be a need for only one CEO.
The brothers “used this occasion to retire from their executive roles,” said Orr, 61, who was CEO of BMO Nesbitt Burns before joining the Power group of companies in 2001. His association with the group goes back to the mid-1980s when, as a banker, he helped write the prospectus that took Power Financial public.
The Power group’s dual holding company structure dates back to an era of diversification and conglomerates, Orr said, and Power Financial was created to house pure-play financial services interests. As Power Corp. adapted and held fewer outside investments, the stake in the financial services subsidiary began to represent an outsize chunk of its value.
The reorganization announced Friday will narrow the focus to financial services and investment platforms in Europe, North America and China — through which Power makes its own investments and increasingly invests on behalf of third parties. After that, other holdings within the group “won’t be on strategy,” said Orr.
While nothing is “on the block,” he said the company “will look to realize value from these investments over time.”
The restructuring is intended to increase liquidity by boosting the size of the public float, reduce operating and financial expenses, and it will feature a 10 per cent dividend increase beginning in the second quarter of 2020. It is also bringing Power Corp. more in step with current corporate governance by separating the roles of CEO and chairman.
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Power Corp. will remain public and under the control of the family
What it does not do is speak to succession.
Paul Desmarais III and his cousin Olivier, both 37, have been working as executives with Power Corp. since 2014, but nothing about their roles will change as a result of the changes unveiled Friday, according to Orr.
“Today’s announcements from a management point of view are about Paul and André, and it’s really a management of continuity and evolution,” he said.
“It does not affect in any way Paul III or Olivier or what they’re doing. They each have roles within the group and they look after different parts … of the investment platforms.”
Paul III’s responsibilities include a growing portfolio of fintech companies, while Olivier has oversight of renewable energy platforms and investment operations in China, he said.
John Aiken, an analyst at Barclays, called the restructuring and executive retirements “a big shake-up for a static organization.”
In a note to clients, he said the simplification of the Power group’s organizational structure “should go a long way to unlocking some of the value that was trapped within the double holding company discount.”
However, he said a “minority discount” on Power’s net asset value is likely to linger, given the Desmarais family’s continuing control.