SGF REACHED ITS OBJECTIVES IN 2007, WITH INVESTMENTS OF $233 MILLION. WHAT WERE ITS MAIN INVESTMENTS DURING THE YEAR?
In line with its three strategic orientations and its development plan, SGF invested $233 million in 2007.
For example, SGF acquired 490,000 common shares of Logibec Groupe Informatique Ltd. (TSX: LGI) at a cost of $9.6 million as part of a private placement of 1,204,700 new shares issued by the company. Logibec, whose head office is in Montréal, is one of the 10 largest Canadian companies specializing in the development, marketing, implementation and support of information systems for the health and social services sector. In this way, SGF is involved in Logibec’s strategy of development through acquisitions.
Another major undertaking was a $37.5-million investment in Induspac. Founded in 1977 by Paul Gaulin, Induspac is a high-performance company with its head office in Montréal. It employs 1,500 people at 29 operational sites. Since its inception, the company has developed specialized, high-value-added packaging solutions for the aerospace, automotive, medical technology, telecom and electronics industries. Its expertise enables it to provide end-to-end management of major international corporations’ packaging portfolios. SGF’s investment will assist Induspac with its plan to expand its operations in Canada, Mexico and the United States as well as to move into the high-growth markets of Eastern Europe.
Once again this year, SGF invested in the agri-food industry, taking a $5-million stake in Boucherie Jean-Guy Soucy Inc., a family company that processes meat for the supermarket and food-services industries. Since its founding in 1976 and the establishment of its first plant in Saint-Jean-sur-Richelieu, Boucherie Jean-Guy Soucy has been known for its very high standards of quality and flexible response to customer needs. This ability to adapt has earned it recognition from large retail banners and restaurant chains as a reliable supplier of processed meat products. SGF’s investment has enabled Boucherie Jean-Guy Soucy, among other things, to finance the construction of a processing plant in Saint-Jean-sur-Richelieu and to acquire two production lines for the slicing of delicatessen meats and two lines for the manufacture of precooked products. In this way, SGF is supporting the growth plan adopted by Boucherie Jean-Guy Soucy, while enabling the company to develop new markets.
SGF also maintained its presence in the film industry in 2007 with two major investments. In a sustained effort to attract international film production to Québec, SGF partnered with Lionsgate Entertainment on a US$400-million project extending over the next four years. SGF will finance up to 35% of the production cost of each feature film and television series made in Québec under the agreement, which involves a total investment of US$140 million over four years. The portion invested by Lionsgate represents US$260 million. The agreement covers various feature films and television series that Lionsgate will shoot entirely in Québec.
Lastly, by making a $100-million investment, SGF also acquired a 38.5% stake and 51% of the voting rights of Alliance Films Inc., Canada‘s largest independent film distributor. As a result of this investment, the head office and decision-making centre of Alliance Films is relocating to Montréal from Toronto. Certain senior managers as well as a large number of the company’s finance employees and its Home Video division will therefore move to Montréal. With this investment, SGF is helping Montréal consolidate its role as one of Canada’s major film centres and position itself advantageously in the North American and European markets.
HOW DO YOU EXPLAIN THE 3% RETURN RECORDED IN 2007?
Net earnings for 2007 are twice the amount we forecast, which was $25 million. In other words, our results are excellent, especially if we consider the following factors:
First, the economic context, characterized by the rising dollar, the surging price of oil, the slowing of the U.S. economy and intense international competition.
Second, the composition of SGF’s portfolio, with 80% of its holdings in manufacturing companies.
A third factor that could affect the return is SGF’s mandate, which requires it to make all of its investments in Québec and in economic development projects, in the form of direct equity investments in companies. In this respect, SGF differs from the tax-advantaged funds.
Despite these challenges, SGF achieved net earnings of $57 million. This performance is due to careful management of our investments, the close relationship we maintain with our partners, who had the courage to undertake difficult turnaround initiatives, and the expertise of our employees, who assisted our partners and sought out solid business opportunities, even in the hardest-hit sectors.
MANY SECTORS OF THE ECONOMY, INCLUDING THE FOREST SECTOR AND PETROCHEMICALS, HAVE BEEN AFFECTED BY THE RISING DOLLAR AND THE PRICE OF OIL. WHAT IS THE IMPACT OF THESE FACTORS ON SGF’S INVESTMENTS?
SGF acquires equity positions in companies. That's its mandate, its culture and its source of pride. It will therefore always be exposed to the ups and downs of the economy.
We’re involved in sectors that have come under pressure, but continue to have growth potential for Québec. There are several aspects to our work:
• We look for solutions with partners that are experiencing difficulty, such as certain portfolio companies in our pulp and paper portfolio
• We engage with industry stakeholders, public decision-makers and academics for a strategic assessment of the future of certain economic sectors, as was the case of the forest sector in 2007.
In addition, as a result of the in-depth expertise we have developed, we can focus on the niches of the future, which will enable us to make promising investments, even in industries in difficulty. Induspac is a fine example.
Changes in the economic context may call for a strategic realignment in certain sectors, but we will not withdraw from them, because we believe in the development potential of all our investment areas.
THE FILM INDUSTRY IS A NEW INVESTMENT AREA FOR SGF. WHAT IS THE ADVANTAGE OF BEING INVOLVED IN THIS SECTOR?
SGF has preferred areas of investment, but it is always willing to invest in business opportunities that have a structuring impact and the potential for profitability, in line with its strategic orientations and mandate. Our investments in the film industry are fully aligned with our first strategic orientation: to carry out structuring projects with partners from outside Québec.
The film industry is definitely a promising sector for Québec’s economy. Québec has considerable expertise in this area, first-rate facilities and skilled manpower. Its originality and creativity are recognized around the world.
Our investments in this area generate the equivalent of 8,200 direct and indirect full-time jobs, representing $325 million of wages. The long-term spinoff benefits for the sector are also considerable, in terms of manpower development, film technologies and Québec’s reputation abroad. In terms of production, SGF invests strategically in feature films and television series, an approach that spreads risk over several products and several years.
HOW DID SGF’S HOLDINGS IN COMMERCIAL PAPER AFFECT ITS RETURN?
SGF holds $132 million of non-bank asset-backed commercial paper. For SGF, these holdings do not represent an investment, because all its investments have to contribute to economic development, but rather a means of managing cash over the short term. When SGF sells investments, it sometimes has a high level of liquidities prior to making a new investment, and cash flow management enables it to earn a return on surplus cash. As at December 31, 2007, we recorded a write-down of $ 19.9 million or 15% of our commercial paper holdings, which has therefore reduced our 2007 return.