Quebecor QBR/b CN
December 18, 2002 - 4:42pm EST by
2002 2003
Price: 14.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 900 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Quebecor Inc. (ticker QBRB: TSX) participates in several different businesses through its 54.7% interest in privately held Quebecor Media Inc., and its 23.6% economic interest (75.4% voting interest) in Quebecor World Inc. (ticker IQW: NYSE; TSX).

Stub Trade Idea:
Acquire shares of Quebecor Inc., and simultaneously sell short the proportionate number of Quebecor World shares owned through the purchase of Quebecor Inc. shares (sell .532 IQW shares for every 1 share of QBRB – see analysis below). This isolates Quebecor Inc.’s media assets, thereby creating stub ownership in Quebecor Media, which is currently trading at -$4.00 per share. I believe that the media stub presents a unique opportunity for ownership in quality Canadian media assets at a bargain price.

Trade Assumptions (C$):
Shares of IQW owned by QBRB 46.9
Less: Exchangeable Debt Shares 12.5
= Adjusted IQW shares owned by QBRB 34.4
QBRB Shares Outstanding 64.6
IQW shares owned per QBRB Share 0.532
Long QBR/B $14.12
Less: IQW Short Sale (18.12)
= QBR Media Equity Value/Share (4.00)

Quebecor Media Inc. (“Media”) consists of the following businesses:
Videotron -- Cable television provider with approximately 1.45 million subscribers, serving the province of Quebec
Sun Media Corporation -- Newspaper and magazine publisher, including urban dailies Le Journal de Quebec, The Toronto Sun, The Ottawa Sun
TVA Group -- (ticker TVAB: TSX) Largest French-Language broadcaster in North America, with over 35% market share in Quebec
Leisure/Entertainment -- Collection of media assets including a chain of music stores, a chain of video stores, as well as a book and magazine publishing segment

Media also has a 71% owned business telecommunications operator, a web integration business, and a collection of Internet portals and e-commerce sites - I have attributed zero value to these businesses.

Quebec's public pension fund manager, Caisse de depot et placement (“the Caisse”), owns the remaining 45.3% of Media not owned by Quebecor Inc. The Caisse acquired its interest in Media through a 2.2B C$ cash investment in Media, which was used as part of the consideration for Media’s acquisition of Videotron in October 2000. Prior to Videotron’s acquisition by Media, the Caisse had invested 500M C$ in the cable operator, thus bringing the Caisse’s to date investment in Media to 2.7B C$.

I do not believe that the current EV/EBITDA multiple of 4.7x accurately portrays the value of Media. The key to the story is Videotron: I have used a conservative 2003 EBITDA estimate (265M C$), as Wall Street equity and debt analyst estimates range from 275-285M C$ - our estimate assumes GDP like growth and resolution of the labor dispute within the next six months. I believe our 6x multiple is also conservative, as Canadian cable operators have historically traded at 7-10x EBITDA. Cogeco Cable, with only 836K basic subscribers and net debt/EBITDA of 4.6x, is sells for 6.8x EBITDA. I have applied slight haircuts to the Street estimates for Sun Media and the Liesure/Entertainment segments, and I believe 8x and 6x EBITDA, respectively, are fair multiples. These assumptions argue for appreciation of 9.50 C$/QBRB share, as exhibited below:

EV/EBITDA Multiple Calculation (C$):
QBR/B Shares Outstanding 64.6
QBR/B Ownership 54.7%
Implied Equity Value (472)
Plus: Media Net Debt 2,889
= Implied Enterprise Value 2,417
2003E EBITDA 515
= Implied EBITDA Multiple 4.7 x
Media Net Debt/EBITDA 5.6 x

'03 EBITDA Multiple Value
Videotron 265 6.0 x 1,590
Sun Media 225 8.0 x 1,800
Liesure/Entertainment 25 6.0 x 150
Less: Media Net Debt (2,889)
= Media Equity Value 651
Less: Caisse Ownership (45.3%) (295)
= Media Equity Value to QBRB 356
QBRB Shares Outstanding 64.6
Media Value per QBRB Share $5.51

Finally, it should be noted that current Quebecor bond trading levels imply a debt to EBITDA multiple of 5.4x; thus the bond community attributes more value to the Media assets than does the equity market.

Concerns that appear to be weighing on the implied value of Media are as follows:
1) Workers at Videotron went on strike on May 8, 2002, which has resulted in disruption at Videotron, including vandalism to the cable network and expenses incurred for the hiring/training of replacement workers and additions to security. Management indicated that the strike cost Videotron 9.4M C$ during the latest quarter. Even so, EBITDA for the Q3’02 increased about 2M C$ sequentially, and year-over-year quarterly EBITDA decreased by roughly the amount that the strike cost the company.

While it is clear that it is a heated debate, I believe concerns over resolution of the dispute are too extreme. In addition, Quebecor Inc.’s partner in Videotron, the Caisse, wields significant political power in Canada and has great incentive to turn its investment in Media (2.7 billion C$) into a positive value.

In addition, Videotron has experienced basic subscriber loss over the last four quarters. Management attributes these losses to DBS providers and piracy. However, it is noteworthy that Videotron lost only 8K basic subscribers in Q3’02, versus 29K and 26K in Q2’02 and Q1’02, respectively. For comparison, in the last quarter, Shaw Communications lost 29K basic subscribers (off a base of 2.13 million), Rogers Communications lost 2K basic subscribers (off a base of 2.26 million), and Cogeco Cable lost 8K subscribers (off a base of 844K).

2) There are concerns in the marketplace that Media has excess leverage. I disagree. The key issue is whether Sun Media and Videotron generate enough excess cash flow to satisfy the 125M C$ in annual cash interest expense at Media. Given that Media has 182M C$ cash on hand, and Sun Media alone is expected to generate in excess of 100M C$ of free cash flow annually, I do not expect any surprises on this front in the near to intermediate term.

Further, I expect that Media will, at some time in the near term, re-work its credit arrangements at the very least at Sun Media, and potentially at Videotron and the parent, Media, to remove some of the restrictive covenants currently in place. The benefit of this event could be a re-balancing of debt between Sun Media, Videotron and Media and/or less restrictive covenants governing the “flow of funds” between the different business units.

3) One final concern is that the investment community apparently has less than 100% faith in management. I do see some cause for concern here, most recently evidenced by management’s decision to sell 6.8M IQW shares in order to satisfy its portion of a 2003 debt maturity, after insisting only weeks prior that a share sale was not an option to consider. Despite doing the right thing, management managed to anger investors in the way it carried out its plan. Another example is the botched succession plan announcement at World. However, despite these negatives, I believe that management realizes that the best course of action at present is to concentrate on operating efficiently. I believe management is capable of this course, which will eventually deliver value to shareholders.


Resolution of strike, reduced balance sheet complexity, greater transparency of stub value.
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