Bill Morneau Grew His Firm With Debt. Can He Do the Same for Canada?

  • New finance minister must implement deficit-spending pledges
  • Private-sector record offers hints of what he might do

Bill Morneau used debt to help propel his family company into a Canadian heavyweight. Now he’ll try a similar feat with the country’s sluggish economy.

As Canada’s new finance minister, Morneau, 53, is charged with implementing Prime Minister Justin Trudeau’s pledge to run deficits of about C$25 billion ($18.8 billion) over three years with an aim to spur growth. He’s setting out just as Canada’s budget watchdog cut its growth forecast and projected higher deficits.

Justin Trudeau and Bill Morneau
Justin Trudeau and Bill Morneau
Photographer: Sean Kilpatrick/The Canadian Press via AP

While the rookie lawmaker has only been on the job for 12 days, Morneau’s private-sector track record offers clues into his management style. Under his leadership, Morneau Shepell Inc. grew steadily, in part through acquisitions financed by debt, chiefly its 2008 purchase of Shepell-fgi. Its share price has outperformed Canada’s equity benchmark and the company earned a reputation for solid management. Yet it’s regularly fallen short of analysts’ earnings estimates -- this week, it missed earnings-per-share expectations for the 17th-consecutive quarter, data compiled by Bloomberg show.

‘Positive Energy’

Morneau brushed aside a question of what his history at the company means for his future as minister. “I wouldn’t want to draw that analogy too far,” he said in Ottawa Tuesday.

“We want to bring a positive sense of energy, so those are very common things from the way you might want to effectively manage in the private sector,” Morneau said. “With respect to my specific background, of course we’ve had some briefings on taxes, we’ve had some briefings on other topics that I’m broadly familiar with.”

Trudeau’s platform called for about C$10 billion in deficit spending in fiscal 2016 and 2017, and C$5 billion in 2018. The budget-watchdog report this week showed Canada is already on pace for deficits totaling C$12.7 billion across Trudeau’s first three budgets -- before Liberal promises are accounted for.

Morneau said this week his department will deliver an official fiscal update by Dec. 31 and it’s too early to say what impact the weakening outlook will have on election pledges. He’s nonetheless now in charge of the purse strings -- replacing Joe Oliver, a fellow former Bay Street executive who served as finance minister in the last two years of Stephen Harper’s Conservative government.

Going Public

Morneau Shepell is a human-resources and pension-services firm that was founded by Morneau’s father in 1966, merging with Sobeco in 1997 and going public in 2005. The younger Morneau served as president from 1992 to 1998, then as president and chief executive officer until 2008, as chairman and CEO until 2009 and then as executive chairman until last month.

The company has carved out a niche through organic growth and acquisitions, with revenue more than tripling to C$535.9 million by the end of 2014 from before the Shepell acquisition in 2008.

Morneau Shepell had C$325.7 million in long-term debt at the end of September, consisting largely of a credit line and about C$73 million of convertible debentures, its latest quarterly financial statement shows. Its total debt to EBITDA ratio stands at about 3.2, including the debentures, in line with its peers, according to Trevor Johnson, an analyst with National Bank Financial. The ratio measures the company’s ability to pay off its debt with earnings before interest, taxes, depreciation and amortization.

Game Changer

"He clearly understood the strategic imperative for growth," said Rod Phillips, former president and CEO of Shepell-fgi who is now chairman of Postmedia Network Inc. Morneau is a "pragmatic optimist," he said, who used debt judiciously to add new business so it could compete on an international scale.

The market has applauded the company’s record. Shares rose 54 percent from going public in 2005 to Oct. 26, when Morneau stepped down as chairman, giving the company a market value of C$750 million as of Wednesday. The Standard & Poor’s/TSX Composite index rose 25 percent over the same period.

“The Shepell acquisition was a game changer for them,” Stephen Boland, a GMP Securities analyst who tracks the company, said in an e-mail. “They are a leader in employee-assistance programs and have no equal in Canada.”

Take Risks

Morneau, who is married to Nancy McCain, part of the McCain food family clan, didn’t just keep his business on autopilot. He grew the company, diversified it and earned a reputation for “running a tight ship” with reliable corporate controls and governance, said National Bank’s Johnson. “He ticks all the boxes.”

For now, Morneau remains on a learning curve in his new role. He still holds a 4.7 percent stake in the company, with a value of about C$35 million. His total compensation last year as executive chairman was C$1.07 million. As finance minister he’ll instead earn C$247,500 annually. Three months ago, at the start of the campaign, he brushed aside questions of leaving the private sector for politics.

“My view is you have to take some risks, and in the best-case scenario you can have a material impact on what’s a pretty great country,” he said. “In the worst-case scenario, you dust yourself off and figure out what the next venture is.”

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