Source : Globe & Mail

It is nice to be courted, especially by those who once ignored you. To suddenly go from the accident-prone outsider to the most popular, coolest kid in the class can do wonders for your self-esteem. Without proper grounding, it can even go to your head.

Pierre Karl Péladeau knows this well. He spent a few years in Canadian financial market purgatory in the wake of Quebecor Inc.'s $5.4-billion purchase of Quebec cable giant Vidéotron in 2000. Now, Bay Street seemingly can't get enough of PKP. They're even encouraging him to extend his media empire chez les anglais.

Mon dieu, mais qu'est-ce qui se passe?

RBC Dominion Securities has been shopping Craig Media and it's no secret it has been wooing Mr. Péladeau. The pitch goes like this: Combine Quebecor's popular Sun newspapers in Calgary, Edmonton, Winnipeg and Toronto with Craig's TV stations in those cities and you've got a convergence dream certain to make investors salivate at the subsequent prospect of a Quebecor Media initial public offering.

As tempting as it sounds, Mr. Péladeau should pass on this one. The fit between Craig and Quebecor, as compelling as investment bankers may try to make it sound on paper, isn't there. Bigger and better things await Mr. Péladeau if he is patient.

Quebecor Media, the unit 55 per cent owned by Quebecor and 45 per cent by the Caisse de dépôt et placement du Québec, has become a star in Quebecor's stable. Barely a year ago, according to an analysis by Carl Bayard of Desjardins Securities, the then debt-heavy media unit was a $6 drain on Quebecor's share price. Now, it contributes about $12 of the parent's stock price of about $28, an $18-a-share turnaround. And, Mr. Bayard adds, the market still undervalues Quebecor Media. He places the net asset value of the unit at about $19.86 a share.

Adding Craig to the mix will do nothing to ameliorate the market's appreciation of Quebecor Media. If anything, the purchase of Craig for an amount anywhere near the rumoured $200-million to $250-million asking price would unnerve investors on the eve of a Quebecor Media IPO. The asking price works out to as much as 23 times Craig's EBITDA -- earnings before interest, taxes, depreciation and amortization. Too dear by far.

And for what? A few small TV stations in Western Canada and a hopelessly marginal one in Toronto? Imagine the pitch to media buyers or big advertisers like Procter & Gamble: "We can combine the Sun papers -- No. 2 in their markets, but No. 1 among the young consumers who count -- with Craig's Western A-Channels and Toronto 1, which are number, um, well, who knows what number they are," Quebecor's salesmen would say. Not too convincing, is it?

At home, Quebecor runs a well-oiled convergence steamroller. Each of its main media assets -- cable, newspapers, magazines, television, record and video stores -- are No. 1 in their market segments in Quebec. Its TV network, TVA, had 40 of the 50 top-rated shows on Quebec television in 2003. Is there a network anywhere in the free world that can top that?

What's more, TVA's top shows were all produced in Quebec for, and often by, the network. And when you control the content, as you do with your own productions, the convergence potential is countless times more interesting.

Quebec will get a taste of just what Quebecor's convergence masterminds have been up to when Star Académie 2004 makes its debut on TVA on Feb. 15 -- fetching advertising rates at least 50 per cent higher than last year's inaugural edition of the variety-reality show.

Still, Quebecor has likely run up against the limits of growth in its home market. You can only get so dominant. And with a potential audience of maybe 6.5 million Quebeckers who watch French-language TV or read French-language newspapers and a couple of million potential cable subscribers, the pond remains a small one.

Mr. Péladeau knows this, too. Quebecor Media, if it is to grow appreciably, must expand its presence outside Quebec. But there has to be some logic for such expansion, a logic that builds on the convergence model Quebecor has implemented in Quebec.

There would be no such logic to a Quebecor-Craig union. But there would be a compelling argument to be made if, for instance, BCE eventually decides to sell CTV.

Now, the union of the private TV network -- No. 1 in most Canadian markets -- with the Sun newspapers is a convergence play advertisers would love to hear about.

Mr. Péladeau would have liked to buy CTV a few years ago. But his pockets were not as deep as those of BCE, which ultimately paid $2.3-billion for the network in 2000. CTV is worth considerably less than that today.

If and when BCE decides to sell CTV, it's not clear BCE would favour Quebecor. Mr. Péladeau has been a relentless critic of BCE, which he accuses of cross-subsidizing satellite TV provider Bell ExpressVu and doing little to stanch satellite signal theft in a bid to damage cable providers such as Vidéotron. CTV had also been embroiled in a nasty legal fight with Quebecor over royalty payments to a CTV-owned French language sports channel, but the two sides settled that dispute in December.

Nor is it clear that investors would want to see a newly publicly traded Quebecor Media plunge back into the realm of debt-financed acquisitions à la Vidéotron.

Then again, if CTV does come on the market, Quebecor has to jump to the front of the line. The market may not like it at first. But Mr. Péladeau knows that before long, it will come courting him again.

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