Gelco

"The tccf debt was paid off by Desmarais over the next few months through the sale of some tccf assets. Levesque also kept 12 percent of tccf and control of f-i-c Fund Inc., a tccf subsidiary. Over the next year, Desmarais traded or sold some of tccf’s holdings to f-i-c in return for more tccf shares, until Gelco finally controlled more than 57 percent of tccf."

"It was an odd situation, because Desmarais was habitually author¬ itative and responsible — the true qualities of leadership — whether operating as a sole proprietor, a senior partner, or within a joint-stock operation. In the last case especially his habits served him well, because he was too undercapitalized to realize his plans without the many partners that come with control of a public company. And with Gelco he was establishing the track record by which he would be judged in future ventures."

"The structure of Gelco, 75 percent owned by Desmarais and 25 percent owned by Parisien, meant that as Desmarais directed, so went Gelco. As Gelco directed, so went its 57-percent-controlled subsid¬ iary, Trans-Canada Corporation Fund. That meant Desmarais called the shots at Provincial Transport, Les Joumaux Trans-Canada and Imperial Life, and had a major voice in the policies and direction of The Investors Group. Desmarais also held a 15 percent position in Montreal Trust company through Investors.1 Overall, by 1968, the Desmarais-built empire had reported assets of $75 million, and a record of success in controlling or influencing the profitable direction of companies worth about $2.5 billion. Desmarais’s track record showed, by this time, two critical elements necessary to continued success and growth in business. One, he was loyal to and worked well with shareholders and other backers of companies he controlled. Two, when prepared to follow his lead, these “partners” in his success profited. “He’s been accused of being tough on shareholders,” said David Schulman. “And that’s because he can tolerate more risk than some of the people who buy in. But the record shows that those who stick by him do well.”"

"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"

"which they so excelled. They traded their assets to acquire control of Power. The deal worked this way: 1. Power created a special 5 percent second preferred share issue of 10,000,000 shares at $12 per share ($120 million total). 2. The number of 6 percent participating preferred shares — the ones that carried 10 votes each, and dictated control of the company — was increased. 3. Enough of the 5 percent second preferred shares were offered to Trans-Canada Corporation Fund shareholders on a one-for-one trade for Power to acquire all tccf shares. 4. Gelco received 57 percent of the Power second preferred shares offered for purchase of tccf; the remaining 43 percent of tccf shares were redeemed from their holders, making tccf a 100- percent owned and controlled Power subsidiary. 5. Then Peter Thomson traded a bit more than half of his 6-percent participating preferred shares of Power — the ones that carried 10 votes each — to Gelco on a two-for-three swap for the new 5- percent second preferred shares (with no votes). 6. The trade gave Desmarais voting rights through Gelco on Power’s board slightly greater than those of Thomson, who held his Power shares through a recently created holding company, Wamock- Hersey International, which held a number of Thomson’s non- Power investments. 7. Between them, Desmarais and Thomson controlled about 61 per¬ cent of Power’s votes and, consequently, Power’s board. 8. Desmarais became chairman and chief executive officer and Peter Thomson deputy chairman. 9. Desmarais and Thomson entered into a voting trust, whereby Thomson’s voting shares were voted by Desmarais."

"There was another problem Desmarais faced — money. Gelco’s wealth took the form of Imperial Life and Provincial Transport stock. Gelco was using its earnings directly, or leveraging them (borrowing against them) to buy into blue-chip and speculative investments. In a move to streamline Provincial Transport, Desmarais had also sold Quebec Autobus and used the proceeds to buy the last of the in¬ dependent inter-urban bus operations in Quebec. So, for continued growth, Desmarais had recently issued a $5-million, 15-year deben¬ ture on Provincial Transport Enterprises Ltd. He didn’t want to sell either operation, as they were good moneymakers. Basically, Desmarais had good assets, clean balance sheets, and income, but no surplus large enough to buy 51 percent control of tccf, which would cost about $30 million. This essentially sums up the 1960s for Desmarais: a search for a ready and continual source of cash to finance his vision; and creative wheeling and dealing to acquire the assets that could be liquidated for the cash he needed. When Levesque decided at the end of 1964 that he was going to sell tccf whole, he also agreed that Desmarais would get the com¬ pany. They began working out the details in early 1965, and the final shape of the deal was hammered out that April in the Florida sunshine. Desmarais, through Gelco, would make a public offer for 55 percent of tccf for $28.6 million (2.2 million shares at $13 each). This would be accepted, tccf would, in turn, purchase Provincial Transport and the shares of Imperial Life from Gelco for $31 million. The $31 million would be paid to Gelco, which would use $28.6 million of the payment to pay tccf shareholders for their shares."

"Desmarais saw a great opportunity in Gelco. It had a $ 10-million investment portfolio, but it could be bought for whatever the 3.3 million shares were worth on the open market. Demand was high for the shares after they were issued, in fall 1961, at $1.20, and prices rose to $3 at year end. After the initial euphoria and share trading, though, the investment and management rationales underlying Gelco were examined and found wanting by the market, and prices declined to a 60-cent low in summer 1962. Desmarais was keeping an eye on Gelco. It’s likely he held a block of shares in the company, which made it easier to watch its progress; shareholders have access to more information about the progress and management of a company than the general public, and can also acquire lists of all other shareholders. In July, 1962, Paul Desmarais was in the bush near Sudbury, treating some of his Sudbury Bus Lines employees to a few days of fishing at the boss’s expense. The bucolic peace of the fishing camp was broken when a message arrived from Montreal that Gelco’s prices had collapsed to 60 cents and showed no sign of revival. Desmarais rushed back to Sudbury, flew to Montreal and took the first connecting flight to London, England. He installed himself in a hotel and offered British Gelco shareholders $1 per share. The same offer was made to Canadian Gelco shareholders by Transport Management Corp. Ltd. Gelco’s shareholders were eager to unload their apparently worthless shares, and by December 1962, after five months of buying, Trans-"

"Once the Power-TCCF merger occurred, though, Desmarais only had his 31-percent voting stake in Power. Though he had effective control of Power, he didn’t have absolute control, and if La Presse were brought into the Power portfolio, Desmarais could technically be in violation of the act. So, before the deal was consummated, Compagnie de Publication de La Presse was pulled out of the tccf portfolio and placed under control of Gesca Ltee., a direct subsidiary of Gelco. Gesca held the voting stock of Compagnie de Publication de La Presse Ltee., and Desmarais met the conditions of ownership of La Presse. However, to maximize the potential return on the Power deal, a $19,750,000 income debenture secured by the assets of La Presse was issued to Power. Consequently, 100 percent of the equity of La Presse was controlled by Power, as were all of La Presse's earnings, but voting and management control stayed in Desmarais’s hands, according to the law.2"

"Also, Power needed a coherent philosophy and direction. It needed a chairman who could take decisive control, provide the company with a vision and impose his will to achieve it. There was confusion as to who was actually running Power, Peter N. Thomson, the chair¬ man, or W. I. M. Turner, president. Power appeared out of control, going in too many directions at once. Interestingly, it looked like Gelco did when Desmarais took control of the company — an in¬ vestment portfolio that wasn’t coherent and didn’t work to the benefit of shareholders."

"At the end of April, Investors issued 3,000,000 voting common shares to the parties that provided $36 million of the financing for the Great-West share purchases: Power Corp., Canadian Pacific Investments, James Richardson & Sons, Canadian Imperial Bank of Commerce, the Royal Bank of Canada and Peter D. Curry (one of Power’s senior executives and a key Desmarais advisor). Then, in early May, Investors offered 1,600,000 cumulative redeemable convertible preferred shares at $25 each to raise the remainder of the financing costs. By the end of the transaction, Investors owned 50.1 percent of Great-West Life bought for $70.8 million (including costs). In turn, Investors issued stock worth $76 million to finance the acquisition and its costs. Also, 10 percent of Investors had been acquired by Great-West, one of the conditions of acceptance championed by Kil- gour, so that Great-West wouldn’t appear simply to have been ab¬ sorbed by Investors. And Desmarais, through Gelco’s control of Power, which had 30.1 percent of Investors, was in an influential position to guide Great-West Life in new, profitable directions."

"company that owned La Presse, Quebec’s most influential French newspaper. Step Four: Gelco paid Peter Thomson the $7.2 million for his Power shares from the $19 million it received from Power. Step Five: The remaining $12 million was applied against Gelco debt."

"on the national, continental and global fronts. Desmarais himself had also participated in general market investments through a maze of personal and family-held investment and holding companies so inter¬ twined that even their names seem to merge: Prime, Gabriel, Gelco, Trans-Canada Corporation Fund, Sanpalo, Pansolo, Nordex, Probec, Abonnec, Primgab, Beldo, Polprim, Louidem, Paquerais, Adremed, Sofiamar — all were vehicles to ensure that the portion of wealth accruing to the Desmarais family interest in Power and its holdings, along with other, private investments, moved upward as dividends, at the minimum rate of personal tax payable by individual family members, for management, reinvestment and other dispositions."

"portation Management owned 50 percent of Gelco shares, which were again trading at $3. Desmarais had effective control of Gelco and became president of the company. As president and controlling shareholder, he framed and executed the company’s investment policies and controlled the treasury. He began liquidating Gelco’s investment portfolio because it had positions in many investments, but control in none, and was vulnerable to market forces and decisions of management that it could not influence."

"Desmarais, through holding companies, was going to be the “sig¬ nificant shareholder’’ wherever possible. It became the hallmark of his working pattern to hold a significant block of shares of a company he saw as a good investment. In this way he would be ensured enough seats on the board of directors to exert control through influence or numbers — preferably influence — to maximize profits and, hence, dividends that would flow upward, eventually, to him. By March, 1963, Gelco had enough cash in the treasury to go hunting. The target was Imperial Life Assurance Company of Canada with assets of $332 million. According to one folksy anecdote, Des¬ marais looked in his treasury and saw $10 million. He then ran a finger down the stock listings in a newspaper, hit upon Imperial Life, calculated that buying control would cost $10 million, then bought it."

"Imperial was the likely target because it was in the top 10 of Canadian insurance companies in size and earnings and was very conservatively managed. As a result, the company was profitable, and shareholder dividends were growing. Prospects for the future of insurance were bright, as the industry was going through a period of growth and strong stock market performance. Imperial was ideal to Desmarais’s needs. Gelco bought 45 percent of the company for $9 million; it acquired control in early 1964 by paying another $1,249,000 for enough shares to raise its stake to 51.2 percent."

"After Desmarais joined the Canadian Breweries board, Gelco, the Desmarais-Parisien holding company, bought 131,434 common (vot¬ ing) shares of Argus and sold them to the Power subsidiary, Sha- winigan Industries Ltd., in 1969. Shawinigan then bought additional Argus shares to bring its holdings up to 175,484 shares, or 10.4 percent."

"The attitude Desmarais adopted in the 1960s was that the Gelco strategy entailed the simple acquisition of a company (Gelco) with an unspectacular investment portfolio that could easily be liquidated and reinvested in better-performing investments. In less polite terms, Desmarais was stripping Gelco’s assets for redeployment into more sensible directions. He did, however, ensure that other minority share¬ holders got fair treatment — good dividends, some capital growth — while he pursued his strategy. Besides his dividend-bearing shares in the company, Desmarais earned fees from the companies he managed and from his outside directorships."

"idends and share values, because their assets were deployed improp¬ erly and could be bought cheaply. He had no specific targets, but was watching for whatever toothsome corporate opportunities presented themselves. The vagueness of his plans could cause trouble with minority shareholders; it was obvious, therefore, that Desmarais would eventually have to take majority control, possibly even take the com¬ pany private, that is, buy all outstanding Gelco shares for 100 percent ownership."

"In late 1964, to gain majority control of Gelco, Desmarais sold to Gelco, for $7.8 million, the assets of Transportation Management, less the shares it held in Gelco. In payment, Gelco issued enough Gelco shares to Desmarais and Parisien to cover the purchase, raising their total holdings in Gelco to 80 percent. No cash changed hands."

"he was blessed by luck. Subsequent to the Gelco deals, Desmarais always tried to target companies that had single or “key man” ma¬ jority shareholders who were willing to sell."

"even though their shareholdings would be diluted — all of the share¬ holders who previously held 50 percent of the company now held only 20 percent — the dilution of their ownership would be more than balanced by the increase in Gelco share values that would result from the improved asset base and dividend stream."

"which in turn held 51.2 percent of Imperial Life, worth $10.2 million. Transportation Management also held a minority interest in Trans- Canada Corporation Fund (tccf), as well as a portfolio of other speculative and blue-chip investments. Overall, as president and chair¬ man of Gelco, Desmarais commanded a corporation worth a minimum of $20 million, invested in companies with $406 million in assets."

"Transportation Management in turn owned wholly the assets of Provincial Transport, worth about $7.8 million; 50 percent of Gelco, worth about $2 million, which in turn held 51.2 percent of Imperial Life, worth $10.2 million. Transportation Management’s investment portfolio also held, among other investments, shares worth about $2 million in Trans-Canada Corporation Fund, the investment and hold¬ ing company dominated by J. L. Levesque, with investments of $66 million."

"By the end of 1965, Desmarais’s Gelco acquisition plan would be near enough completion that it could be seen for what it was — brilliant in its conception of interlocking wheels within wheels, yet simple in its execution, exemplifying the clarity of vision that seized upon the opportunity. The strategy had been formed because, as quickly as he had acquired 50 percent control of Gelco (as senior in the partnership that controlled the holding company), and as quickly as the redirected Gelco investment portfolio had furthered Desmarais’s ambitions, suc¬ cess wasn’t happening fast enough for him. After Gelco bought control of Imperial Life, Desmarais paused in the acquisition and growth game to consolidate what he had already acquired. To recap: at this point, Transportation Management owned wholly the assets of Provincial Transport, worth about $7.8 million; 50 percent of Gelco, worth about $6 million (at a cost of $2 million)."

"Ontario and Quebec, he would have had to take the offensive against Greyhound, but he realized the costs of doing so would consume all he had laboriously accumulated since 1950. So he performed a flank¬ ing manoeuvre — not only on Greyhound, but on the entire business community — by diversifying, buying Gelco and through it Imperial Life Insurance. In this way, Desmarais, the boss of Quebec’s trans¬ portation business, became a new, small challenger on the Quebec corporate scene."

"“It [the purchase] moved him from being a small operator, largely in the French Canadian milieu, to the big leagues,” said journalist Amy Booth. “It was a major turning point, and the Royal Bank was clearly involved. One day Desmarais was doing his own thing and the next day the Royal Bank was effectively his partner. Booth was referring to the large block of Desmarais-owned (through Gelco) Trans-Canada Corporation Fund shares which the Royal Bank held as security for loans and returned so he could have bargaining chips when working out the Power deal. Until the Power acquisition, the Royal Bank had bankrolled most of Desmarais’s deals since 1955, but not out of any conscious attempt to become kingmakers. “I don’t think they’ve ever thought that far,” said Booth. “Maybe the bank would like to think so now, that it set him up in Power, but I don’t think that was the case. Bankers aren’t that smart.”"