Quebecor Inc. is doubling down on its cable and media business, making a $1.5-billion bet that Quebecor Media is undervalued and can churn out higher profits in coming years despite growing competitive pressure.
Montreal-based Quebecor Inc. said it reached a deal that will see investor Caisse de dépôt et placement du Québec sharply reduce its stake in the privately held media subsidiary after more than a decade of weak returns. The agreement will boost Quebecor's stake in its media unit to about 75 per cent from 54 per cent.
The bulk of Quebecor Media's profit comes from its Vidéotron Ltée cable service, and it owns a slate of telecommunications, television, newspaper and other media operations.
For Quebecor chief executive officer Pierre Karl Péladeau, the deal amounts to a gamble that there's room to increase profits at the company's cable and mobile phone operations amid uncertain prospects for its newspaper and television assets.
Mr. Péladeau said Wednesday he wanted to take advantage of favourable debt markets and increase his stake in Quebecor Media rather than allow the Caisse stake to be sold to someone else.
"We have a partner here," he said. "Based upon our long-term plan, we think the best way to approach higher returns for our shareholders long term is to go the way we just selected."
"Sure, there would have been another opportunity and an alternative to buy our own stock, but we don't think that would have been the best result," Mr. Péladeau added.
But analysts are uneasy about Quebecor's move. Competition for cable subscribers has intensified sharply as Bell Media rolls out new services in Quebec and alternative services such as Netflix make it easier than ever for consumers to cut their cable.
The transaction comes in the wake of other cable deals – such as Cogeco Inc.'s $1.3-billion purchase of U.S.-based Atlantic Broadband this summer – that have been criticized for placing too high a price on assets many feel is in decline. Cogeco shares fell sharply when it announced that deal.
Most investors don't expect much from the division's media assets, said Maher Yaghi, an analyst of Desjardins Securities. But with a larger stake in the subsidiary, Quebecor would find itself with a greater share of any profits generated.
"Media is cyclical," he said. "Right now the cycle isn't in their favour, but it will come back. Historically the market hasn't been willing to pay a premium to Quebecor for its stake in Quebecor Media, but this is making a bet that the market is going to someday appreciate and be ready to pay for its value."
Quebecor chief financial officer Jean-François Pruneau said Quebecor is paying a good price for solid assets. "Considering the expected financial performance of [Quebecor Media], we believe that the price paid is fair," he said.
Quebecor's upbeat outlook for its media operations stands in contrast to Mr. Péladeau's recent comments in front of Canada's broadcast regulator, when he warned that the cable business was under threat as he tried to convince the Canadian Radio-television and Telecommunications Commission to reject a merger between BCE Inc. and Astral Media.
Mr. Peladeau said the merger would put too much content in the hands of BCE's media division and raise the price of the Bell Media-owned programming that cable providers need to buy in order to keep their customers satisfied, saying Bell would be a "monster that will kill the business."
Quebecor Media is the largest newspaper publisher in Canada by number of titles through Sun Media, and its TVA Group Inc. is the most popular general interest network in Quebec. In its last fiscal year, broadcasting and news contributed about $200-million to Quebecor's operating profit while its telecommunication activities contributed $1-billion. Telecommunications includes cable television, Internet and mobile services.
The Caisse engineered its divestment more than a decade after helping Quebecor to fund its $5.5-billion takeover of Groupe Vidéotron Ltée in 2000. It was left with a 45.3-per-cent stake in Quebecor for its $2.2-billion investment, and said Wednesday it would reduce its stake to 24.6 per cent as part of the deal.
The deal also guarantees the Caisse can unload its holdings in 2019 by forcing Quebecor to spin out the media unit in an initial public offering or allow the shares to be sold to another large investor. Quebecor could buy its remaining stake at any point.