Debt as Temporary Tool, Never Permanent Foundation

"his bankers into terminal shock. Desmarais has used debt as one instrument to finance his ambitions, yet has always been uncomfort¬ able carrying large debt — it leaves a company vulnerable to its creditors and erodes the controlling position of its managers, because creditors, especially bankers, feel they can dictate the conduct of"

"One, he had learned from the Sudbury Bus Lines experience that heavy debt-financing is a precarious foundation for a company’s fi¬ nances; it erodes the value of future earnings, which have to be plowed into debt servicing, rather than dividends to shareholders. Two, in his early deals he was chronically short of cash. Because his cash flow was generally plowed back into operations, rather than to acquisitions, he always had to find alternative and creative ways to finance his deals. Three, he was and is smart enough to find creative ways to finance his ambitions."

"So, while restructuring was simplifying Desmarais’s task of bol¬ stering income, it still didn’t deal with Power’s debt. Personally, he still didn’t have complete control of Power. Desmarais’s final moves in 1970 — all of which were intertwined in a complex shifting of assets, cash and debt — solved Power’s debt problems, Gelco’s debt problems, Desmarais’s desire for control, and improved Power’s in¬ come picture. Step One: In early December, Power sold its oil and gas holdings for $13.25 million and paid off Power’s $12 million debt, about which Power’s backers, the Royal Bank, were becoming edgy. The edginess resulted because not only did Power carry a large debt; so did Gelco, the Desmarais-Parisien holding company through which they held their Power shares. Step Two: A week later, through Gelco, Desmarais bought the rest of the Power 10-vote 6-percent participating preferred shares that Thomson held through Wamock-Hersey International, for $7.2 million. At this point, Thomson was left with just under 2 percent of the voting power in the company that his father had helped found, and Desmarais had well over 50 percent of Power votes, with just under 19 percent of the company equity. Step Three: Since Desmarais now owned majority control of Power, it could no longer be viewed as an “English establishment” corporation. So, he sold to Power for $19 million the Gesca Ltee. income debenture that Power had sold to Gelco in 1969 to defuse public and government criticism that an “English establishment” company controlled the"