The Caisse de dépôt is reducing its ownership stake in Quebecor Inc., more than a decade after it helped the Quebec-based media company fend off an attempt by Rogers Communications to buy Videotron cable service.
The pension fund manager is selling 30.5 million shares in Quebec Media in a deal valued at $1.5 billion, cutting its ownership stake in the operating arm of Quebecor Inc. (TSX:QBR.B) to 24.6 per cent from 45.3 per cent.
The deal 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.
Under the deal, Quebecor Inc. will increase its holdings in QMI to more than 75 per cent from less than 55 per cent.
It 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.
It intends to take advantage of low interest rates to access financial markets to pay for the shares.
Quebecor will buy back an additional 10.2 million shares by issuing to the Caisse $500 million in subordinated convertible debentures, which are convertible into Quebecor Inc. class B subordinate shares.
The deal allows Caisse to either force Quebecor Media to become a public company in 2019 or let it sell its remaining stake to a third-party. Quebecor could also repurchase the shares.
"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."
He said the transaction won't impair the financial flexibility Quebecor needs to grow the capital intensive telecom business. But Peladeau 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 and as well as dividends that have been paid to the Caisse.
Longer term, Quebecor's goal is to simplify its holding company structure and reduce the share price discount for the holding company, 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'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 even though he's comfortable that Quebecor Media's net debt will increase nearly to the level at the end of 2008.
"We believe many may question why CDPQ 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.
Adam Shine of National Bank Financial said the transaction 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 in a report.
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 News Media.
Quebecor, the company behind Sun Media Corp, Vidéotron and others, is today one of Quebec's top five private 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 were down 30 cents at $33.12 in midday trading Wednesday.