A Quantitative Analysis of the Repurchase of Stock between Quebecor and the Caisse de depot et de placement du Quebec

A QUANTITATIVE AND QUALITATIVE ANALYSIS OF THE REPURCHASE OF STOCK

BETWEEN

AND

ALEX BOTTAUSCI • MARK LEMOINE • YOUSEF MADANI JOHN MOLSON SCHOOL OF BUSINESS CONCORDIA UNIVERSITY EMBA 681 CORPORATE FINANCE DR. HARJEET BHABRA DECEMBER 1ST, 2012

A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani

EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University

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TABLE OF CONTENTS

INTRODUCTION 3 COMPANY PROFILES 3 Québecor Inc.

Caisse de dépôt et de placement du Québec Quebecor Media Inc.

THE CABLE, TELECOMMUNICATIONS & MEDIA INDUSTRIES 6

The Cable Industry The Telecommunications Industry The Media Industry

THE COMPARABLE COMPANIES 9 Bell Canada Enterprises Inc.

Rogers Communications Inc. Shaw Communications Inc. Cogeco Inc.

THE TRANSACTION 11

2000 2012 VALUATION OF QMI’S SHARES 13

Two Valuation Methods Statements and Assumptions

VALUATION 1: MARKET-‐BASED COMPARABLES COMPANIES APPROACH 15

Step 1: Equity Step 2: Debt Step 3: The Total Value of the Firm

VALUATION 2: THE DISCOUNTED CASH FLOW APPROACH 17 SCENARIO 1

Step 1: Free Cash Flow to the Firm (FCFF) Step 2: Cost of Capital (KD) Step 3: Cost of Debt (KE) Step 4: Weighted Average Cost of Capital (WACC) Step 5: Discount the FCFFs and Terminal Values

SCENARIO 2 THE FINAL ESTIMATED PRESENT VALUE OF QMI SHARES 20

ANALYSIS AND DISCUSSION 20 The Deal’s Impact of QBR and QMI The Deal’s Impact on CDP CONCLUSION 23 APPENDIX 1 24 APPENDIX 2 25 APPENDIX 3 26 REFERENCES 27



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INTRODUCTION On October 3rd of this year, Québecor Inc. and the Caisse de dépôt et placement du Québec

(CDP) reached an agreement on the partial sale of the CDP’s interest in Quebecor Media Inc.

(QMI). Québecor will purchase a total of 30.5 million shares valued at $1.5 billion.

The purpose of this study is to analyze the quantitative and qualitative aspects of the CDP’s

reduction in ownership of QMI, including the motives and non-‐financial considerations

behind the deal. In addition, this paper will seek to determine if fair value was realized and

validate or disprove the National Post’s analysts’ claim that this “pegs the Value of QMI at

about $6-‐billion, representing a 20% premium”.1

COMPANY PROFILES

Québecor Inc.

Québecor Inc. (TSX: QBR) was founded by Pierre Péladeau in 1950, in Montréal, Québec

with a small neighbourhood newspaper. Mr. Péladeau went on to build a vast

communications empire offering cutting-‐edge technology and constantly evolving business

solutions. Today, Québecor has a fast-‐expanding national presence but remains profoundly

attached to its roots, hence one of the main motives behind the initial transaction. A new

generation of managers is drawing on the company's traditions to sustain and nourish its

growth into the future. For 2011, Québecor reported revenues of $4.3 Billions and a net

income of $374 Millions.

Pierre Karl Péladeau is the current President and Chief Executive Officer and is also the

firm’s majority shareholder, possessing 72.16% interest in the company (Appendix 1). 2

The Chief Financial Officer (CFO) is Jean-‐François Pruneau. The current members of

the board of directors of Québecor Inc. are;

• Françoise Bertrand, Chairwoman of the BOD

• Rt. Hon. Brian Mulroney Vice-‐Chairman of the BOD

• Pierre Karl Péladeau

• Jean La Couture • Sylvie Lalande • Pierre Laurin • Geneviève Marcon • Pierre Parent



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In 2000, Québecor Inc. opened a new chapter in its development with the acquisition of the

Groupe Vidéotron Ltée., the largest cable operator in Québec. Along with Vidéotron,

Québecor picked up its subsidiaries Netgraphe, an important Web content developer and

operator of numerous Web properties, and TVA Group, owner of the TVA broadcasting

network and of magazine publisher TVA Publishing.

To carry out this major acquisition, Québecor formed a partnership with a major financial

backer, the Caisse de dépôt et placement du Québec, and together created a new subsidiary,

Quebecor Media Inc. Today, the bulk of Quebecor Media’s profit, and in turn Québecor’s

comes from Vidéotron.

Caisse de dépôt et de placement du Québec

The Caisse de dépôt et placement du Québec (CDP) was founded in 1965 by an act of the

National Assembly and it manages institutional funds, primarily from public and private

pension and insurance funds in Québec, including the Régie des rentes du Québec and the

Commission administrative des regimes de retraite et d’assurances, amongst dozen others.

The CDP is headquartered in Québec City but has its major business office in Montréal.

The CDP has traditionally favoured Québec businesses. The CDP’s mandate, as defined by

legislation passed in 2003, is to “achieve an optimal return on the deposits of its clients, or

depositors, while contributing to Québec's economic development”3. This concept was

further pressed just weeks before the QBR and CDP transaction. After winning the

provincial elections in early September 2012, new Québec Premier Pauline Marois, who

fought off the recent U.S. takeover bid for Québécois home-‐improvement chain Rona Inc.,

said that the role of Quebec’s pension fund should be strengthened to keep corporate

headquarters in Québécois hands. 4 Nicolas Marceau, Québec’s Finance Minister, also

proposed additional revisions to the CDP’s mandate so that it would further promote

economic development and work to “keep the strategic decision-‐making centers here.”

The CDP’S large holdings make it a formidable player in investment markets. Today it is the

leading private equity investor in Canada and it is also one of the 10 largest real estate

asset managers in the world.5 It is the second largest pension fund in Canada, with the



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Canada Pension Plan (CPP) in first place.6 In addition, the CDP’s financial soundness has

earned it the best credit ratings issued by the following credit rating agencies: Moody's

Investors Service, Standard and Poor's, and Dominion Bond Rating Service.7 As of February

2012, the CDP’s total assets under management amount to $159 billion.

The CDP’s President and CEO is Michael Sabia, the Vice-‐President and Chief Risk officer is

Claude Bergeron, and the CFO is Maarika Paul. The current Board of Directors of the CDP

are:

§ Robert Tessier Chair of the board

§ Michael Sabia § Elisabetta Bigsby § Luise Charette

§ Jocelyne Dagenias § Michèle

Desjardins § Pierre Fitzgibbon § Denys Jean

§ A. Michel Lavigne § Jean Pierre Ouellet § Réal Raymond § François R. Roy § Ouma Sananikone

Quebecor Media Inc.

Quebecor Media Inc., a fully integrated media and telecom company, was founded in 2000

and is headquartered in Montréal, Québec. It is a subsidiary of Québecor Inc. and it

operates mostly in the province of Québec but is also present in the rest of country. QMI

possesses several divisions and they include; Vidéotron, a cable, VoIP, and internet service

provider, Sun Media and Canoë, the largest newspaper publisher in Canada, TVA, the largest

French language broadcaster and publisher in North America, and Archambault, a music

and book retailer. QMI’s 2009 revenues totalled $3.7 billion, while its EBITDA stood at $1.2

billion.

Pierre Karl Péladeau is the President and CEO, and the CFO is Jean-‐François Trudeau.

Current members of the board of directors of Québecor Media Inc. are;

§ Serge Gouin Chairman of the BOD

§ Pierre Karl Péladeau § André Delisle

§ Jean La Couture § Rt. Hon. Brian Mulroney, § Samuel Minzberg § Normand Provost



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THE CABLE, TELECOMMUNICATIONS & MEDIA INDUSTRIES

Canadian cable, telecommunications and media businesses operate in highly competitive

industries that are experiencing relentless rapid technological developments and in turn

necessitate large capital investments by the firms. The following provides the reader some

insight into these industries that are very much linked and dependent on each other.

The Cable Industry

Cable television has been available in Canada for more than 50 years and it is a well-‐

developed market. As 2010, there were approximately 8.3 million cable television

customers in Canada. The total industry revenue for 2012 was estimated to be over $10.1

billion. These revenues are expected to grow based on the fact that Canadian cable

operators have aggressively upgraded their networks and have begun launching and

deploying new products and services, such as cable Internet access, digital television

services and telephony services. The following table summarizes the most recent available

industry revenue statistics for the Canadian and American cable television industries and

the Compounded Annual Growth Rate.

CANADIAN & US CABLE INDUSTRIES 2010 2009 2008 2007 2006 CAGR

REVENUE (BILLIONS) $10.10 $9.20 $8.20 $7.10 $6.10 13.5%

The Telecommunications Industry

The details found in this segment description have been largely taken from Mergent’s North

American Telecommunications Sectors May 2012 industry review.

The Canadian telecoms industry is one of the most developed mobile markets in the world,

with Canadian consumers continuing to adopt wireless services at a healthy pace. This has

resulted in carriers offering coverage to more than 99% of Canadians. Overall, the wireless

communications sector plays an important role in the telecoms industry, generating a total

economic value of about $41 billion. The Canadian Wireless Telecommunications

Association (CWTA) estimates wireless phone customers in Canada numbered 25.1 million



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at the end of June 2011, or about 75% of the population, with wireless service providers

reporting a net addition of 314,456 new subscribers.

The majority of Canada’s telecom companies recorded increases in revenues over the first

half of 2012. Mobile advertising revenues are growing throughout Canada, with mobile

search advertising generating most of the revenue. The Interactive Advertising Bureau of

Canada announced in the spring of 2012 that mobile advertising revenue jumped from

C$22.8 million in 2009 to C$46.6 million in 2010. It has now been forecasted that revenues

will rise by nearly 110% in 2012, climbing to an estimated C$98 million. The share price

over the six months ended April 2012, overall Canadian telecom share prices rose by an

average 6.48%, up from the April to October 2011 period, when share prices declined by

6.59%.

The outlook for the telecommunications sector is relatively positive, but not strong, with

intense competition between both big and small players in the industry reflected in price

growth over the past six months. Over the past year, there were constant new product

launches including new smartphones and digital TV products, resulting in the higher use of

wireless services. As the rate of adoption for smartphones and tablets continues to climb,

spending on wireless data is expected to more than double in the next year.

The Media Industry

The details found in this segment description have largely been taken from Mergent’s North

American Media Sectors August 2012 industry review.

Despite being dwarfed by the American media industry, the Canadian media industry is

large by international standards. It plays a crucial role in Canada’s economy and in public

communication, covering an area of 9,984,670 square kilometers with a population of 34.3

million divided almost equally among rural, suburban and urban areas. Canadian media

content is popular globally in certain markets, although not on the same scale as US media

content. Many English and French-‐speaking countries around the world air and publish

Canadian media content regularly.



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Modern Canadian broadcasting began in the 1930s with the formation of the Canadian

Broadcasting Corporation/Radio-‐Canada (CBC), which runs all public broadcasting. Private

broadcasting is diverse and also mature, with a concentrated market mostly shared by four

major television networks — CTV, Global, TVA and V. The CRTC lists slightly fewer than

commercial 2,000 radio stations across Canada. In addition, there were 95 English and

French language paid-‐for dailies in circulation at the end of 2011, and more than 1,100

community newspapers.

The (CRTC) reported that the estimated broadcasting segment revenues totalled C$15.713

billion and were up 8.94% in 2010, reflecting revenue improvement in all of the

broadcasting segments. While cable and direct-‐to-‐home/multipoint distribution service

plus IPTV revenue rose by 8.94%, television revenue grew by 10.59% and radio by 2.92%.

Television advertising spending is forecast to grow by 6.75% in 2012, while radio

advertising spending is forecast to pick up by 3.73%. Online advertising spending is likely

to rise by 23.32% in 2012, more than total advertising spending on print newspapers and

magazines, due to total US print advertising spending would drop by 6.11%.

Canadian television broadcasters’ 2011 advertising revenues were up 4.74%, representing

47.92% of the industry’s total operating revenues. The shares of leading Canadian

companies performed well over first half of 2012. The following table identifies the leading

Canadian media companies share price movements in the six months from December 2011,

to May 2012.

COMPANY TICKER STOCK EX. PRICE 01/12/11

PRICE 31/05/12 DIFFERENCE %

RISE/FALL THOMSON REUTERS TRI NYSE US$26.88 US$27.47 US$0.59 2.19

ROGERS RCI TSX C$37.81 C$35.32 (C$2.49) -‐6.59

SJR SJR NYSE US$20.61 US$19.08 (US$1.53) -‐7.42

QUÉBECOR QBR TSX C$32.55 C$37.75 C$5.20 15.98

TORSTAR TS.B TSX C$8.51 C$9.57 C$1.06 12.46

Avg. Rise/Fall % 3.32



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This upbeat outlook for the media industry stands in contrast to Mr. Péladeau’s recent

comments in front of the CRTC, 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. Québecor’s CEO’s

motive must be taken with a grain of salt, considering that the deal would have made one

its main rival much stronger in the Québec market.

THE COMPARABLE COMPANIES

The following four companies, BCE, Rogers, Shaw and Cogeco, compete with Québecor and

Quebecor Media in the cable, telecommunications and media industries and share many

characteristics, including business models, with Québecor and QMI, and in turn provide the

most accurate comparable companies for the financial valuation process conducted in this

study. Brief summaries of selected financial data are found in Appendix 3.

Bell Canada Enterprises Inc.

Bell Canada Enterprises Inc. (TSX: BCE) is headquartered in Montréal, Québec and operates

predominantly in Canada, providing services to over 20,000,000 residential, business and

wholesale customers. The company was originally founded in 1880 but was incorporated

under federal charter in 1970 as Tele-‐Direct Ltd., and continued to operate under the

Canada Business Corporations Act of 1979. The company was renamed Bell Canada

Enterprises Inc. in 1983 and shortened it to BCE Inc. in 1998. BCE is a communications

company engaged in providing wireline voice and wireless communications services,

internet access, data services and video services to residential, business and wholesale

customers. The firm operates three divisions: 1) Bell Wireline, which provides local

telephone, long distance, Internet, data, video and other services and products; 2) Bell

Wireless, which provides wireless voice and data communication products and services;

and 3) Bell Aliant, which provides local telephone, long distance, Internet, data, video,

wireless and other information and communications technology services. For 2011, BCE

reported revenues of $19.49 billion and a net income of $2.34 billion.8



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Rogers Communications Inc.

Rogers Communications Inc. (TSX: RCI) was originally incorporated in 1925, in Toronto,

under the name of Rogers Vacuum Tube Company. Although the head offices have always

been based in Toronto, the company went through various name changes until 1986 when

it was finally changed to Rogers Communications Inc. Rogers provides wireless voice and

data communication services, and like BCE, it also has three divisions; 1) Rogers Wireless;

cable television services, high-‐speed internet access, and telephony services, 2) Rogers

Cable; retailing of communications and home entertainment products and services, and 3)

Rogers Media; radio and television broadcasting, televised shopping, magazines and trade

publications, and sports entertainment. Rogers recorded revenues of $12.42 billion and a

net income of $1.56 billion in 2011. 9

Shaw Communications Inc.

Shaw Communications Inc. (TSX: SIR) was incorporated in 1966 as Capital Cable TV Ltd.

and became Shaw in 1993. Shaw is headquartered in Calgary, Alberta and it provides

services for mostly British Columbia, Alberta, with smaller systems in Saskatchewan,

Manitoba and Northwestern Ontario. The company offers broadband cable television, high-‐

speed Internet, digital phone, telecommunications services, satellite direct-‐to-‐home and

distribution services and television broadcasting. The firm is thus divided into three

businesses; Shaw Business, Shaw Direct and Shaw Media, that serve four main business

segments: 1) the Cable segment, which is comprised of cable television, internet, digital

phone and internet infrastructure service businesses; 2) the Satellite segment, which

comprised of direct-‐to-‐home and satellite services; 3) the Wireless Segment, which is in the

development and construction stage; and 4) the Media segment, which includes television

broadcasting. In 2012, Shaw reported revenues of $4.99 billion and a net income of $728

million.10

Cogeco Inc.

The Compagnie Général de Communication, otherwise known as Cogeco Inc. (TSX: CGO),

was founded in Trois-‐Rivières in 1957, and today it is based in Montréal, Québec. It

provides cable television, high-‐speed internet, telephony, managed information technology



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and infrastructure, and other telecommunications services to residential and commercial

customers in the provinces of Québec and Ontario, and it conducts international operations

in Portugal. Through its affiliate Cogeco Cable Inc., the company provides audio, analogue

and digital television, high-‐speed Internet (HSI) and telephony services to residential

customers in Ontario and Quebec. Cogeco Cable also provides its business customers with

data networking, e-‐business applications, video conferencing, hosting services, Ethernet,

private line, Voice over Internet Protocol (VoIP), HSI access, data storage, data security, co-‐

location services, managed IT services, cloud services and other advanced communications

services. Furthermore, Cogeco runs thirteen French-‐language radio stations throughout

Québec, Cogeco News, a news agency feeding close to 24 affiliate and community radio

stations across the province, and it also operates Métromedia CMR Plus Inc., an advertising

representation agency specializing in the public transport sector. Just this year Cogeco

made a $1.3-‐billion purchase of U.S.-‐based Atlantic Broadband, the fifteenth largest cable

provider in the U.S.A., and it has been criticized because analysts believe it paid too high a

price on assets they feel is in decline. Cogeco shares fell sharply when the deal was

announced.11 2012 revenues stood at $1.41 billion but it terms of net income the company

registered a $77 million gain.

THE TRANSACTION

2000

Before outlining the transaction’s motives and details, it’s important to understand why the

two firms entered a partnership in the first place. As mentioned earlier, the CDP’s

traditional role has been to favour and invest into Québec businesses. Québecor is a profit-‐

seeking firm where financial growth is always one of the primary objectives. With this in

mind, in the year 2000, the Toronto based Rogers Communications Inc., one Canada’s

largest communications companies, began a friendly takeover process with Le Groupe

Vidéotron Ltée., an important Québécois cable and media company. In reaction, the

Québecor and the Caisse de dépôt et placement du Québec formed a partnership and

launched a hostile takeover bid and bought out the provincial cable provider and preserved

an important ‘national’ media outlet in Québécois hands. On Oct. 23, 2000, the company



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and the CDP, jointly acquired Vidéotron for $45 per share, in a deal valued at $5.4 billion.

The transaction followed a decision by Rogers to terminate its merger agreement with

Vidéotron. When the dust settled Québecor had 54.7% and the CDP had 45.3% of Vidéotron.

2012

Today, Mr. Péladeau explains the latest deal as the following; “The time frame of the

holding of the Caisse (CDP) was longer than usual … (and) we saw there were some

opportunities in the debt markets.”12 He further added; “the transaction won’t impair the

financial flexibility Québecor needs to grow the capital the capital intensive telecom

business.” He added that other objectives of this transaction are to include the preservation

of operational and financial flexibility and to achieve an optimal capital structure and

maturity profile at QMI.

It was announced on October 3rd, 2012 that Québecor, Quebecor Media and the Caisse de

dépôt et placement du Québec entered an agreement providing the reduction of CDP’s

interest in QMI from 45.28% to 24.64%13. Québecor purchased 20,351,307 shares from the

CDP for $1 billion in cash, and will immediately cancel them. In addition, Québecor also

purchased an additional 10,175,653 shares for $500 million in consideration that the CDP

will receive in return unsecured debentures convertible, bearing an interest if 4.125% and

maturing around October 11, 2018, into Québecor Class B Subordinate shares14 (Appendix

2). This could allow the CDP to either force QMI to become a public company by 2019, or

sell the remaining stake to a third-‐party. Québecor says it intends to take advantage of the

low interest rates to access financial markets to pay for the shares.15 In the end, the deal

was closed on October 2012 and Québecor’s control in QMI increased to 75.36%.

The agreement also allows the CDP to exit rights in 2019, through either an IPO or sale to a

financial third party, and Québecor and QMI are under no obligation to purchase the CDP’s

remaining interest.

According to the National Post, this deal pegs the value of Quebecor Media at $6 billion,

which would suggest a 20% premium.16 The Market Value transaction that took place

between Québecor and the CDP is valued at $ 7.246 billion. This is based on $1.5 billion



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paid for 20.70% shares at $49.14 per share. The following table clarifies the transaction’s

details:

AMOUNT PAID TYPE # OF SHARES

SHARE PRICE

TOTAL VALUE OF SHARES

$ 1,000,000,000 Cash 20,351,307 16.5750% $ 500,000,000 Debt 10,175,653 4.1250% $ 1,500,000,000 30,526,960 20.70% $49.14 $ 7,246,377,048.97

VALUATION OF QMI’S SHARES

Two Valuations Methods

The objectives of this paper is to valuate the shares of QMI and determine if the transaction

was of fair value and validate or disprove National Post’s analysts claim. Two valuation

approaches, methods used to estimate the attractiveness of an investment opportunity, will

be applied: the Market-‐Based/Comparables Companies Approach and the Discounted Cash

Flow Approach.

Valuation 1 -‐ Market-‐Based Comparable Company Approach: To use the Market-‐

Based/Comparable Company Approach one must first look to the public markets for firms

which most closely resemble the target firm and then use indicators of financial position

such as EBITDA, Revenue or Net Income to make comparisons. By consolidating the data it

is possible to make an educated estimate of the value of an equity position in the private

firm, and by adding the firm’s debt value, if any, it is then possible to estimate the firm’s

total value.17 The comparable companies described above, BCE, Rogers, Shaw, and Cogeco

and their financial data, are for the valuation process of this study. These companies share

many characteristics with Québecor and QMI, and in turn it is believed that they offer the

most accurate comparables for the valuation process.

Valuation 2 -‐ Discounted Cash Flows approach: A Discounted Cash Flow (DCF)

analysis uses future free cash flow projections and discounts them (most often using the

Weighted Average Cost of Capital) to arrive at a present value, which is used to evaluate the

potential for investment. The premise of the discounted cash flow method is that the



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current value of a company is simply the present value of its future cash flows that are

attributable to shareholders.18

Statements and Assumptions

• All QMI financial figures are based on QMI’s 2011 Official Financial Statements and

are in millions of dollars. In addition, all financial values are in Canadian (CAD) dollars,

unless otherwise noted.

• The Corporate Tax Rate (TC ) used is 28.4%. This figure was taken from QMI’s 2011

financial statements19.

• Growth Rate (g): The Growth Rate that was considered in the valuation of the QMI

was based on the analyst prospects for long term and future growth in the industry

for parent company. An industry analysis was conducted and the Free Cash Flow to

the Firm (FCFF) is expected grow over the next five years by 9.47%20. Afterward it is

expected and assumed to grow on stable rate of 5%.

• Return on Market Portfolio (Rm): 11.10% is the historical annual average return (1957

to 2006) on Canadian common stocks.21

• The Risk-‐Free Rate (Rf): The Risk-‐Free Rate of 3.70% used in this valuation is based on

the Government of Canada’s Marketable Bonds 10 year historical average.22

Date Rf Low 2012-‐07-‐23 1.58

Average 2002-‐11-‐29 — 2012-‐11-‐28 3.70

High 2003-‐03-‐21 5.22

• Beta (β): Since QMI is a private company there is little public information available,

including its Beta. To overcome this obstacle, two alternatives were determined

suitable:



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1) Use the Québecor’s, the parents company’s, Beta

2) Use the average Beta of the four comparable companies.

Considering that QMI is Québecor’s main operation, and that 86% of the parent

company’s revenues originate from it’s subsidiary, using QBR’s Beta at 0.8423 was

selected as the best number to use.

• Preferred shares will be ignore in the calculation for WACC considering QMI doesn’t

have any preferred shares outstanding.

• Net Capital Expenditure: The values for 2010 and 2011 are $689M and $780.7M,

respectively.24 Considering that, in order to stay competitive, QMI must continue to

make capital expenditures, a conservative increase is anticipated. A value of $800M

will be used in this study.

VALUATION 1 – THE MARKET-‐BASED COMPARABLES COMPANIES APPROACH

The Total Value of the Firm (Vf) is the sum of firm’s Debt (D) and Equity (E) and can be

calculated using the Market-‐Based Method Comparables Companies approach.

Step 1: Equity

The following four indicators of financial position for our comparable companies were

selected: Revenue, Net Income, EBITDA and Total Assets. The following table illustrates the

market data for the four comparable companies:

Comparable Companies Beta (β)

QBR BCE RCI SIR CGO

0.84 0.35 0.48 0.29 0.72



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INDICATOR VARIABLE BCE RCI SIR CGO

# SHARES OUTSTANDING 774,557,247 402,785,156 421,715,646 14,989,338

SHARE PRICES $41.99 $42.57 $21.38 $33.50

MARKET VALUE OF

COMPARABLES (MVC) $32,523,658,802 $17,146,564,091 $9,016,280,512 $502,142,823

1-‐ REVENUE (IC) $19,497,000,000 $12,428,000,000 $4,998,000,000 $1,406,000,000

2-‐ NET INCOME (IC) $2,340,000,000 $ 1,563,000,000 $728,000,000 $77,000,000

3-‐ EBITDA (IC) $7,220,000,000 $ 9,269,000,000 $1,204,000,000 $607,000,000

4-‐ TOTAL ASSETS (IC) $39,426,000,000 $18,362,000,000 $12,722,000,000 $3,104,000,000

The next table estimates QMI’s Market Value of Equity. Listed are the calculated Market

Value Multiples for the comparable companies and their average ratios. These ratios are

multiplied by QMI’s projections to calculate the equity. QMI’s Market Value of Equity is

$5.10 billion.

INDICATOR

(MVC/IC)

BCE RCI SIR CGO RATIO

AVG. QMI VALUE

(IC)

QMI MARKET VALUE

(MVt)

1-‐ MVC/Rev 1.67 1.38 1.80 0.36 1.30 $4,207,000,000 $ 5,478,491,222.35

2-‐ MVC/NI 13.90 10.97 12.39 6.52 10.94 $374,000,000 $4,093,021,038.41

3-‐ MVc/EBITDA 4.50 1.85 7.49 0.83 3.67 $1,341,200,000 $4,918,986,199.69

4-‐ MVc/TA 0.82 0.93 0.71 0.16 0.66 $8,998,700,000 $5,914,901,008.17

Avg. Est. Value: $5,101,349,867.15

Step 2: Debt

The value of the Long-‐Term Debt reported in QMI’s financial statement was is valued at

$3,617,600,000 or $3.62B25.

Step 3: The Total Value of the Firm

Total Value of the Firm (Vf) = Debt (D) + Equity (E) = $5.1B + $3.62B = $8,718,949,867

Total Value of the Firm (Vf) Market-‐Based Comparables Companies Approach = $8.72B



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Having computed Equity, and the Total Value of the Firm, it is now possible to calculate the

Debt Ratio (D/V) and Equity Ratio (E/V) as well as the Weighted Average Cost of Capital

(WACC) for QMI. These computations will be performed in the following section.

VALUATION 2 – THE DISCOUNTED CASH FLOW METHOD

Using the discounted Free Cash Flow to the Firm (FCFF), the Growth Rate (g), Corporate Tax

Rate (TC), WACC, the value of QMI can be found using the Discounted Cash Flow Approach

(DCF). Two scenarios, Scenario 1 and Scenario 2, each using two different short-‐term and

perpetual growth rates (g), are calculated in this section.

SCENARIO 1: The following is a step-‐by-‐step calculation of QMI’s value using the DCF approach:

Step 1: Free Cash Flow to the Firm (FCFF)

FCFF = EBIT (1 – TC) + Depreciation – Δ Net Working Capital – Net Capital Expenditures

i) EBIT(1 – TC) + Depreciation:

EBIT = ($533.2+$311.5) = $ 844.7M (1-‐TC) = 71.60% EBIT(1 – TC) + Dep. = 604.8052 + 509.3 = $1,114.11M

ii) Δ Net Working Capital (2011 – 2010):

A/R = 602.6 -‐ 587.3 = 15.3 INVENTORY = 283.6 -‐ 245.2 = 38.4 A/P = 764.9 -‐ 723.9 = 41 Δ Net Working Capital = $12.7M

iii) Net Capital Expenditure:

Net Capital Expenditure = $800 M

FCFF0 = $301.41M



18

Step 2: Cost of Capital (KE):

KE = Rf + β * (Rm-‐ Rf):

Beta (β) = 0.84 Rf = 3.70% Rm = 11.10% (Rm-‐Rf) = 7.40%

KE = 9.92%

Step 3: Cost of Debt (KD):

Cost of Debt (Kd) = Long term Interest/Long term Debt

(KD) = $303.2M/$3617.6M

(KD) = 8.38%

Step 4: Weighted Average Cost of Capital (WACC):

WACC = (E/V)KE + (D/V))KD(1-‐TC )

Total Long Term Debt (D) = $3,617,600,000

Market Value for Equity (E) = $5,101,349,867.15

Total Firm Value (V) = $8,718,949,867.15

D/V = 41.49%

E/V = 58.51%

D/E = 70.91%

Tax rate (Tc) = 28.40%

WACC = 8.29%



19

Step 5: Discount the FCFFs and Terminal Values:

PV QMI =

I. PV1-‐5 = $329.95 + $361.20 + $395.41 + $ 432.85 + $473.84 = $1,556,967,296.40

II. PV of TV = $10,149,405,047.60

Value of Firm QMI (PV0) =$ 1,556,967,296.40 + $10,149,405,047.60=

$11,706,372,343.99

2011 2012 2013 2014 2015 2016 2017

M$ millions FCF0 FCF1 FCF2 FCF3 FCF4 FCF5 FCFTV FCFt(1+g)t 301.41 329.95 361.20 395.41 432.85 473.84 497.53

Discounted CF 304.69 308.01 311.36 314.75 318.17 10,149,405,048

PV QMI = $11,706,372,344

Scenario 1 PV QMI = $ 11.706 Billion

SCENARIO 2:

Scenario 2 uses the same calculation process that is utilized in the first, but this time a

different growth rate is used. Rather than use a growth rate specific to the Québecor family,

an industry average growth rate of 7.5% for the first 5 years is used and then an arbitrary

3% in perpetuity. To arrive at the industry average growth rate, the growth rate for the

comparable companies were used:

COMPANY EXPECTED GROWTH RATE (g) BCE 2.2 RCI 7.94 SJR 5.1 CGO 15

AVERAGE OF THE 4 7.5



20

Scenario 2 PV Value of QMI = $7.13 Billion

THE FINAL ESTIMATED PRESENT VALUE OF QMI SHARES

Three different firm values for QMI, based on different approaches and two scenarios, were

calculated. Due to the uncertainty in the future growth of the company and based on the

assumptions, Scenario 1 seems to be very optimistic and will give us the higher range of the

price; Scenario 2 will give the lower range of the price. The comparable approach is falling

between these two ranges. With this in mind, some averages were calculated to get to the

final valuation figure.

The average of the three figures is the Final Estimated Present Value of Quebecor Media Inc.

I. Market-‐Based/Comparables Companies Value of QMI = $8.719B

II. Scenario 1 DCF Approach Value of QMI = $11.706B

III. Scenario 2 DCF Approach Value of QMI = $7.130B

The average of I & III = $7.925B

The average of I, II & III = $9.185B

The Final Estimated Present Value of Quebecor Media Inc. = $9.185 Billion

2 2011 2012 2013 2014 2015 2016 2017

M$ millions FCF0 FCF1 FCF2 FCF3 FCF4 FCF5 FCFTV

FCFt(1+g)t 301.41 324.02 348.32 374.44 402.52 432.71 445.69

Discounted CF 299.21 297.02 294.85 292.69 290.55 5,655,560,253

PV QMI = $7,129,881,201



21

ANALYSIS AND DISCUSSION

Now that The Final Estimated Present Value of Quebecor Media Inc. has been established,

the paper will look at the significance of the deal, the valuation difference, and the impact it

will have for the two companies involved.

The Deal’s Impact on QBR and QMI

Industry analysts are uneasy about Quebecor’s move. Competition for cable subscribers

has intensified sharply as BCE’s Bell Media rolls out new services in Québec and alternative

services such as Netflix make it easier than ever for consumers to cut their cable.26 In

addition, the transaction comes in the wake of other cable deals, such as Cogeco’s, that have

been criticized for placing too high a price on assets many feel is in decline, and in response

Cogeco’s shares fell sharply when the deal was announced. As well, Maher Yaghi, an analyst

at Desjardins Securities stated; “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.”27

With this deal, Quebecor now finds itself in a position to amass a greater share of any

profits generated. For Québecor CEO P. K. Péladeau, this amounts to a gamble that there is

room to increase profits at the company’s cable and mobile phone operations amid

uncertain prospects for its newspaper and television assets. Essentially the firm doubled-‐

down on its cable and media business, and made a $1.5-‐billion bet that Quebecor Media is

undervalued and can generate out higher profits in coming years despite growing

competitive pressure.

At the transaction’s press conference, the CEO explained that 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



22

result.”28 In addition, the company’s CFO, Jean-‐François Pruneau, said that QBR is paying a

good price for solid assets. “Considering the expected financial performance of Québecor

we believe that the price paid is fair.”

The deal is more than fair for Québecor and as it can be considered a bargain. Yes, there is

some risk, but it’s a good one. First off, as discussed earlier, the transaction was

undervalued. The following table shows that when one compares our valuation of the deal

to the actual transaction, Québecor made a $401 million gain:

While the analyst’s outlook of the deal may not be favourable, the 3 industries the QMI

competes in will continue to grow, and the firm will certainly follow and take advantage of

this. As well, the increase controlling will allow Québecor and Québecor Media to have

more decisional power in its day-‐to-‐day operations and will give it more flexibility in its

ability to manipulated its capital structure, and in turn be more competitive.

The Deal’s Impact on the CDP

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, which is a reminder that it puts provincial

social and economic development before profits. The transaction will see the CDP sharply

reduce its stake after more than a decade of weak returns. “The total value is $1.5-‐billion,

and for the Caisse, the return is unimpressive” said one analyst.29

So far the partnership has given the CDP an annual return of 0.74%. This ROI cannot be

considered satisfactory. The CDP could have invested in low or risk-‐free investments and

that would have made for a better investment. At this time, the convertible debentures

VALUE OF THE FIRM VALUE OF QMI DEAL

VALUATION FIGURE $9,185,067,804 $1,901,295,000

ACTUAL DEAL $7,246, 376,811 $1,500,000,000

DIFFERENCE +/-‐ : +$401,309,035



23

received in the current deal, with a 4.125% return rate, is a better investment option for

the CDP.

Moreover, the unsecured convertible debentures it received that will mature in 2018 into

Québecor Class B Subordinate shares and will make for an interesting future. Six years

from now the company will come at a crossroad may force QMI go public. Only time, and its

return on investment, will tell if the CDP will want to fully detach itself from this

partnership.

In the end, while the deal may not have been a huge financial success, it can be said that the

CDP fulfilled its main as it helped keep a large and influential Québécois company in

Québec and in Québécois hands.

CONCLUSION

At this point, it is cleat that the transaction is fair for both parties, but from our valuation it

was undervalued. Québecor got a ‘deal’ and will allow it to be more autonomous regarding

business strategies, investments, and capital structure. The competition may be tightening

up within Québecor Media’s three industries may, but they and their revenues are still

growing and will certainly continue to rise. In other words, this is a great deal for the long-‐

term growth. In addition, Pierre Karl Péladeau, the majority owner and CEO, has the

opportunity make significant gains in the future.

On the other hand, the CDP CDP has successfully fulfilled its political and social mandate

and has reduced it stake in am investment that that was not producing a suitable enough

ROI, and now has a better investment with the unsecured convertible debentures.



24

APPENDIX 1

Québecor Inc. & Quebecor Media Inc. CEO, President and Majority Shareholder

Pierre Karl Péladeau



25

APPENDIX 2



26

APPENDIX 3

Comparable Companies’ Selected Financial Data

Balance SheetTotal Assets 39,426,000,000.00 18,362,000,000.00 12,722,000,000.00 3,104,000,000.00 Total Liabilities 24,667,000,000.00 14,790,000,000.00 8,687,000,000.00 3,104,000,000.00 Total Equity 14,759,000,000.00 3,572,000,000.00 4,035,000,000.00 Long Term Debt gross 13,556,000,000.00 10,034,000,000.00 5,263,000,000.00 1,144,814,000.00 Common Equity (Outstanding) 774,557,247.00 402,785,156.00 421,715,646.00 14,989,338.00

Income StatementRevenue 19,497,000,000.00 12,428,000,000.00 4,998,000,000.00 1,406,000,000.00 Net Income to equity Holders 2,340,000,000.00 1,563,000,000.00 728,000,000.00 77,000,000.00 EPS -‐ Net Income -‐ Diluted 2.88 2.86 1.61 4.61 EBITD 7,220,000,000.00 9,269,000,000.00 1,204,000,000.00 607,000,000.00

Ratios

Beta 0.35 0.48 0.29 0.72 Average (all four companies) 0.46 Parent Company Beta 0.84



27

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Investor Relations

A Quantitative Analysis of the Repurchase of Stock between Quebecor and the Caisse de depot et de placement du Quebec