Although the global credit crisis has taken the shine off financial services stocks, Montreal-based Power Financial Corp. remains an interesting investment. It offers exposure to Winnipeg-based subsidiaries Great-West Lifeco Inc. and IGM Financial Inc. at a discount, and could be a good play on the future deregulation of the Canadian financial services sector.

In mid-January, Power Financial’s shares were trading at a discount of about 7% to its net asset value. In this case, its NAV is the market capitalization of its 65% interest in GWL, its 59% ownership of IGM and its 27% holding of Switzerland-based Pargesa Holdings SA.

If the federal government moves to allow mergers among banks and among banks and insurers, Robin Cornwall, president and CEO at Catalyst Equity Research Inc. in Toronto, expects this discount to disappear over the next few years. Should mergers be allowed, Cornwall believes Power Financial’s twin assets of GWL and IGM will be “the most sought-after assets in the country.” The result will be a premium for Power Financial’s shares as suitors line up to acquire the two companies.

Cornwall speculates that Paul Desmarais Sr. — who controls Power Financial through parent Power Corp.’s holding of 66.4% of the 704.9 million common shares outstanding as of Mar. 21, 2007 — would be open to selling GWL and IGM as a package at a suitable premium — say, 10%-20%.

Given the current discount, the upside potential could be 20%-30% — before any boost that earnings growth could add to the price.

In Cornwall’s opinion, problems at Toronto-based CIBC are forcing the federal government’s back to the wall. And, if mergers are allowed, he sees Royal Bank of Canada as a likely bidder. RBC is geared toward wealth management, he says, and has long been interested in acquiring a major life insurer, making a bid for London Life Insurance Co. before GWL acquired this firm.

Cornwall doesn’t think Des-marais is interested in taking a major stake in a Canadian bank. He notes that Power Financial sold Montreal Trust in 1989 because it didn’t want loan liabilities on its balance sheet. Desmarais prefers wealth management and is likely to stick to that.

Cornwall has a “buy” on Power Financial, with a 12-month target price of $48.50 a share — an increase of 31% over the $37 at which the shares were trading in mid-January. The shares had traded as high as $42.49 in December.

Dundee Securities Corp. analyst Susan Cohen’s 12-month target price is $44.75 a share. She expects Power Financial to outperform the S&P/TSX composite index, based on assumptions that IGM’s stock will outperform the market while GWL’s will move in line with it. Cohen is also enthusiastic about Pargesa, which has investments in a number of Paris-based companies.

“While Pargesa accounts for only a small portion of Power Financial’s operating earnings (less than 10%) and about 8% of NAV, it is nevertheless an important source of diversification for the company,” Cohen writes in a report. “Furthermore, the blue-chip and strategically well-positioned companies Pargesa invests in have a history of creating very significant value for its shareholders.”

Cornwall agrees that Pargesa can add to Power Financial’s earnings, but he doesn’t consider it “pivotal.” Nevertheless, Pargesa is important to the Desmarais family because of its strong connections to Europe. As such, he doesn’t expect it to be part of any sale of assets that may occur in Canada.

Financially, Power Financial is a consistent performer. For the nine months ended Sept. 30, 2007, net income was $1.5 billion, down from $1.7 billion for the same period a year earlier. But 2006 results were boosted by a $356-million gain from the sale of one of Pargesa’s investments; there was no similar gain in 2007.

When measuring Power Financial’s profitability, analysts prefer to look at after-tax operating income, which excludes Pargesa as well as unusual or non-recurring items, such as restructuring charges at GWL and/or IGM.

In the first nine months of 2007, operating earnings were $1.6 billion, up 19% from $1.3 billion in the same period a year earlier. The 12-month trailing return on equity based on operating earnings was 19.7% as of Sept. 30. Assets were $130.2 billion, debt was $6.9 billion and shareholders’ equity was $12.4 billion as of Sept. 30.

@page_break@Heading up the management team is president and CEO Jeffrey Orr, a former banker and previous head of subsidiary Investors Group Inc. Veteran Robert Gratton is chairman. Paul Desmarais Jr. is deputy chairman, as well as chairman and co-CEO (with brother André) of Power Corp.

Power Financial and Power Corp. have also added a new chief financial officer, Philip Ryan, who comes from Credit Suisse Group. Long-time executive vice president and CFO Michel Plessis-Belair has just retired after 22 years with the firms; he will continue as a director.

Neither Cornwall nor Cohen know Ryan, but they are not surprised that an outsider was hired. The management teams at Power Financial and Power Corp. are very lean. Cornwall describes the Desmarais family as very good managers who are “long-term thinkers and extremely strategic.”

Here’s a look at Power Financial’s three businesses in greater detail:

> Great-West Lifeco Inc. Backed by Power Financial’s deep pockets and under the leadership of long-time president and CEO Ray McFeetors, GWL has made three major acquisitions in the past 11 years.

In 1997, though its Winnipeg-based subsidiary, Great-West Life Assurance Co. , GWL acquired London Life of London, Ont., which added $36.7 billion in assets under administration as well as the Freedom 55 network of exclusive insurance agents.

Toronto-based Canada Life Assurance Co. was acquired in early 2003, shortly after that firm’s 2001 demutualization. This acquisition brought in $68 billion of AUA and broadened Power Financial’s reach to include Britain as well as adding to its U.S. presence.

Both London Life and Canada Life were successfully integrated and remain strong franchises.

Boston-based Put-nam Invest-ments LLC was added in August 2007, reflecting GWL’s increased emphasis on wealth management. Putnam adds almost $200 billion in mutual fund assets under management, mainly in the U.S., and vastly increases the portion of overall business coming from retail funds. (GWL offers mostly segregated funds; it has about $90 billion in seg fund AUM.)

Even though Putnam’s base is in the U.S., GWL is familiar with the money manager and its products. Its wholly owned subsidiary, Colorado-based Great-West Life & Annuity Insurance Co. , is in the retirement products marketplace, and Putnam has managed institutional money for GWL. Acquiring Putnam makes GWL a major player in the U.S., Cornwall says.

Despite Putnam’s recent troubles — it lost half its AUM from 2002 through 2006, in large part because of its involvement in the U.S. mutual fund market-timing scandal — Cornwall thinks the acquisition is a good one for GWL. He notes that Putnam has “significant brand awareness” and he expects “GWL, with Power Financial’s help, to increase profitability dramatically through operational efficiencies and AUM growth.”

This past year was a busy one for GWL, as it made four small acquisitions. Cornwall calls these “add-ons” that will add to earnings in fiscal 2008. There was also a disposition, with GWL selling its U.S.-based health-care business, Great-West Healthcare, to CIGNA Corp. GWL did not see itself becoming big in health care and wanted to narrow its focus in the U.S. to financial services.

GWL has produced steady growth in earnings over the past decade, partly as a result of acquisitions. The London Life purchase resulted in net income jumping 89% to $473 million on an 84% increase in revenue for fiscal 1998 over 1997. The Canada Life acquisition resulted in net income of $1.6 billion in fiscal 2004, a 34% increase over 2003, on revenue of $34 billion, a 49% increase from the previous year.

For the first nine months of 2007, GWL’s net income was $1.6 billion, up 9.8% from $1.4 billion in the same period a year earlier. Revenue was $18.6 billion, down from $18.7 billion as a result of changes in the fair value of assets held for trading. The 12-month trailing ROE was 21.2%. Debentures and other debts were $5.3 billion as of Sept. 30.

GWL’s share price has dropped recently, trading around $33 a share in mid-January, vs a high of almost $38 in October 2007.

> IGM financial inc. IGM —which is home to Investors Group, Mackenzie Financial Corp. and IPC Financial Network Inc. — has been a steady performer, posting good earnings growth year after year.

IGM was formed after Power Financial acquired Toronto-based Mackenzie in 2001. It married up Mackenzie and Investors Group under the IGM banner, tallying AUM of $80.8 billion. A more recent purchase was IGM’s 2004 acquisition of IPC, which added $7.1 billion in AUA and $1.2 billion in AUM in its Counsel Group of Funds at the time of the deal.

All IGM subsidiaries operate as separate entities.

Under the leadership of co-CEOs Charles Sims and Murray Taylor, IGM is Canada’s biggest mutual fund company, with AUM of $108.3 billion as of Dec. 31, 2007 — $26.6 billion more than second-place RBC Asset Management Inc. Investors Group’s funds constitute IGM’s biggest fund family, with $60.2 billion in AUM as of Dec. 31. Mackenzie had AUM of $46.4 billion; Counsel, $1.7 billion.

Investors Group is a steady performer that has 40%-60% of its long-term assets in funds with first- or second-quartile performance. Net sales are healthy in most years, although they were just $22 million in December. The company has the advantage of a dedicated sales force.

Mackenzie’s funds are subject to more volatility in returns, but the company’s strong relationships with advisors in both the planning and investment-dealer channels have kept net redemptions low — even after four years of weak performance, with less than 40% of long-term assets posting above-average performance. In December, Mackenzie had net redemptions of $136.1 million. With the past year’s turnaround in performance (see page 45), Mackenzie is likely to return to net sales.

IGM’s net income was $644.8 million in the nine months to Sept. 30, up 11.7% from $577.1 million in the same period a year earlier. Revenue was $2.2 billion vs $1.9 billion. The 12-month trailing ROE was 21.6%. Long-term debt was $1.2 billion as of Sept. 30.

IGM’s common shares were trading around $44 a share in mid-January, down from a high of $55 a share in November — a bigger drop, proportionately, than Power Financial or GWL suffered.

> Pargesa SA. Pargesa is essentially an investment portfolio with six major investments, all based in Paris and held mainly through Groupe Bruxelles Lambert (GBL) in Brussels, which was 48.3%-owned by Pargesa as of June 30, 2007.

The six holdings are:

> Imerys SA, which mines and processes minerals globally. Annual sales exceed three billion euros. Pargesa owns 26.8% of Imerys and GBL owns 26.3%.

> Lafarge SA. GBL owns 17.3% of Lafarge, already the biggest cement company in the world. In December, Lafarge announced it is taking over Cairo-based Orascom Construction Industries’ cement group in a deal expected to close at the end of the first quarter of 2008. Orascom is an emerging-markets cement leader with leading market share in Egypt, Algeria, United Arab Emirates and Iraq.

This acquisition is expected to enhance Lafarge’s growth, margins and cash flows, and be accretive within a year. Lafarge had sales of 13.3 billion euros in the nine months ended Sept. 30.

> Pernod Ricard SA. GBL owns 6.2% of this wine and spirits producer. Pernod Ricard had net sales of 1.6 billion euros in the first quarter of fiscal 2008, ended Sept. 30.

> Suez SA. GBL owns 9.5% of Suez, an energy, water and waste services company. The merger of Suez with Gaz de France SA, both based in Paris, was approved by the two companies’ boards of directors in October. The resulting GDF Suez SA will be one of the world’s largest energy utilities firms when the merger is finalized this year.

> Total SA. GBL owns 3.9% of Total, the fourth-largest integrated oil company in the world. It had sales of 115.6 billion euros in the nine months ended Sept. 30.

> Iberdrola SA. GBL owns 3% of this major player in the Spanish energy sector. IE