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Caisse forced to bail on weak Quebecor investment

Quebecor headquarters in Montreal

Robert J. Galbraith/The Globe and Mail

Quebec's big pension plan manager is bailing on a chunk of one of its most contentious and politically driven deals of the past few decades – and booking a meagre return that is a reminder of the cost of putting provincial economic development before profits.

The Caisse de dépôt et placement du Québec's decision to sell just under half its 45-per-cent stake in Quebecor Media Inc. marks the beginning of the end of a saga that began when it teamed up with Quebecor Inc. in 2000 to defeat Ontario rival Rogers Communications Inc. in the takeover battle for cable company Vidéotron Ltée. Quebecor Inc. is buying some shares from the Caisse, and Quebecor Media is buying back some stock for cancellation. The total value is $1.5-billion, and for the Caisse, the return is unimpressive.

The exact annual return is tough to calculate, because much depends on the amount of leverage the Caisse employed over the years. But the headline number, based on the increase in the equity value of the company over a dozen years, combined with dividends, is in the low single digits.

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The Caisse says that its 45-per-cent stake is valued today at $2.75-billion, which puts the value of 100 per cent at about $6.1-billion. The original price in 2000 was $5.4-billion, with the Caisse putting up $2.2-billion, Bloomberg reported at the time. (The Caisse already owned some shares of Vidéotron as well.)

Given the 12-year time frame, that's not much headline value creation at all. It works out to about a 13-per-cent increase in the value of the company, or about 1 per cent a year compounded. The Caisse also said it has received $324-million in dividends from Quebecor Media since 2003. On a $2.2-billion contribution, that's almost 15 per cent in additional return from dividends, but again, over 12 years it doesn't work out to much on an annual basis.

Bernard Landry, the former premier of Quebec, told a reporter from Quebecor in 2010 that the Vidéotron purchase by the Caisse was a trade worth making, because "The destiny of a nation isn't just material." Local ownership may well have helped preserve some local content.

But the destiny of Quebec retirees is material, and the Caisse desperately needs returns or those retirees are in trouble. For example, the Quebec Pension Plan, which the Caisse was created to run, is expected to be out of reserves in three decades. By next year, the manager needs to start generating enough returns to cover a shortfall in pension contributions to the QPP, according to the actuarial report as of Dec. 31, 2009, the most recent available.

According to the report, the QPP had a reserve of $29.6-billion at the end of 2009. That reserve was to increase until 2013, when "cash outflows will be greater than contributions." Then, investment income has to start filling the gap. Except it's not going to be able to do it, and the reserve is going to drop fast about a decade out. "Total depletion will occur in 2039," the actuaries found.

Quebec is not alone. Like many developed regions, it has a greying population and cooling economic growth. Pension contributions aren't going to keep pace with payouts. That means that returns should be the sole focus. to the exclusion of all else. But the Caisse has never successfully hewed to that philosophy for long stretches. These days, the Caisse is back on a buy-local binge, justifying its decision to prefer Quebec companies by saying its managers have a competitive advantage in picking Quebec investments.

If the new Parti Québécois provincial government in Quebec insists on using the Caisse as a government policy tool – and statements during the election campaign signalled that is the case – the price for choosing politics over returns with the province's pension money will be steep.

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