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Street has already locked in any Quebecor Media IPO gains

News that Quebecor may deal with a host of woes by spinning out its media holdings was an overdue acknowledgment of the obvious to the Street's most aggressive investors.

Quebecor, burdened by heavy debt and a stock that trades at a stunning discount to the value of its underlying assets, announced last week that it is contemplating an initial public offering of its cable and newspaper holdings. Analysts see the sale of a stake in the Vidéotron cable, TVA channel and Sun tabloids raising up to $500-million for the parent company.

This idea came as no surprise to many hedge fund-type investors. The pros have long since locked in the gains that an IPO may bring.

A report last week on potential restructuring plays from UBS Securities shows that from the summer of 2001 through to this spring, Quebecor was worth less than the value of its holding in publicly traded printing subsidiary Quebecor World.

In other words, the market assigned a negative value to the cable television and newspaper assets. To some pros, this discount just didn't seem right.

To lock in the value of the media play, without exposure to the printing company, UBS analyst Jeffery Fan explained that an investor would simply sell short shares in Quebecor World and buy shares of the parent conglomerate in the proper ratio.

(A short sale occurs when the seller borrows stock from a brokerage, and sells it, expecting the price to fall. If the stock drops, the seller will buy it back at the lower price to replace the stock that was borrowed, and pocket the difference as profit.)

Many funds made this trade, and made a fortune. A glance at Toronto Stock Exchange statistics shows that Quebecor World has been one of Canada's five largest short positions for more than a year, with 10 to 12 million shares consistently sold short.

What were the funds locking in when they shorted Quebecor World? When the parent company's discount to net asset value was at its worst last September, Mr. Fan calculates that investors got the media assets at "negative value" of more than $7 for each Quebecor share.

When Mr. Fan initiated coverage of the companies in June, the non-printing assets within Quebecor had bounced back, with a positive value of $2.03 a share. Early this month, the value was up to $3, and the UBS analyst sees the "stub value" of Quebecor Media hitting $8.69 a share if Quebecor and its printing subsidiary achieve his target prices.

Most investors will only appreciate what's been buried inside Quebecor when the media assets start to trade on their own. That's not going to be for a while: The second coming of Vidéotron and the Sun chain is likely several months away. But for a few institutions, the prospect of a Quebecor Media IPO has already made for an enormous win.

Equity funds lack appeal

For months, the Canadian mutual fund industry has been scratching its collective head over the fact that U.S. investors have fallen in love again with equities, while north of the border the industry still faces redemptions.

The trend may finally be turning.

Frank Hracs, former chief economist at TD Securities and RBC Dominion Securities, just crunched June's domestic mutual fund sales figures. At first blush, the numbers seemed bleak -- investors pulled another $577-million out of funds, bringing year-to-date total redemptions to $2.9-billion.

But Mr. Hracs says that on a seasonally adjusted basis, net sales were positive in June, for the first time this year and only the third time in 13 months. He added in a report that for those looking for "at least the emergence of a bottom, it may be noteworthy that the 12-month moving total of net sales posted an uptick in June for the first time since January, 2002."

Despite these glimmers of hope for the industry, it's clear Canadian equity funds still can't attract flies, despite the stock market's gains. Mr. Hracs takes the view that the majority of investors are always late to the equity party. Looking at June's numbers, he said: "It may not be too many months before talk of a more buoyant domestic mutual fund sector escalates, and becomes increasingly self-reinforcing."

The concept that the vast majority of investors do a poor job of timing markets gets support from the Investment Dealers Association's most recent numbers on margin loans.

At the height of the bull market, late in 2000, Canadian investors carried up to $11.9-billion worth of loans from Canadian brokerage houses, debt they shouldered to buy stocks. When borrowing hit this peak, the IDA was so concerned about margin loans that it began to compile monthly data on industry lending, and warn investors of the perils of leverage. And with hindsight, it's clear that there couldn't have been a worse time than the top of the tech craze to use borrowed money to buy stocks.

This year, stocks have done well, and a glance in the rear-view mirror shows that March's lows represented a buying opportunity. Yet figures released this month indicate Canadian investors continue to be wary of playing the market with borrowed money. Margin debts touched three-year lows of $6.6-billion in May.

© 2007 The Globe and Mail. All rights reserved.

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