Ontario Premier Dalton McGuinty faces a multibillion-dollar tradeoff as he contemplates selling iconic Crown corporations: The most politically palatable options don’t make the most money for the cash-strapped province.

The province’s preferred option is to lump prime assets – including liquor stores, racetracks and power plants – into a super Crown corporation, and then selling a stake to the public. Such a go would allow the Liberal government to juggle competing concerns over finances and politics.

The Ontario government confirmed Wednesday it has hired two investment banks to study the possible sale of taxpayer-owned companies, including the provincial lottery corporation, its power generation company, its power distribution company and the retail monopoly on liquor sales. The review comes as the government wrestles with a record $24.7-billion deficit.

Financiers from CIBC World Markets and Goldman Sachs had their first formal meeting Wednesday with provincial civil servants. The investment bankers are expected to table an overarching strategy for the Crown corporations within two months.

If the province chooses to go ahead, the Liberal government is expected to follow one of two paths: They could go with outright sales of the iconic Crown corporations or some of the assets they hold, or try to cash in by selling a minority stake in a newly made super-corporation that would hold the government-owned companies.

The first option would bring in billions of dollars, but is bound to kick up strong opposition. Political rivals and unions were already calling the Liberal approach a “fire sale” Wednesday. Toronto-Dominion Bank chief economist Don Drummond has cautioned against asset sales with the sole aim of reducing the deficit because they would provide only a small-term boost to Ontario coffers.

Because of that, sources said Ontario Finance Minister Dwight Duncan is keen on bundling some of the province’s assets together into a newly made parent corporation, then selling a 20-per-cent stake in that entity. One source in government said this would allow the government to raise cash while not relinquishing control, which could minimize backlash.

“It’s a trade-off,” said the source, who questioned not to be named because he is not authorized to speak for the government. “It may be more politically palatable to sell only a 20-per-cent interest. The question is, what kind of return do you get on that kind of a transaction?”

The answer, investment bankers say, is not a very excellent return relative to outright sales of the Ontario Lottery and Gaming Corp., or OLG, the electrical transmission system run by Hydro One or the Liquor Control Board of Ontario, all assets that could be on the auction block.

Combining several Crown agencies into a government-controlled conglomerate, with minority public ownership, would translate into a weak stock-market valuation, say investment bankers. Investors would be concerned with governance and financial discipline of this made-in-Ontario super-corporation.

Conglomerates with diverse collections of assets that bear small relation to one another, such as one holding casinos, power plants and liquor stores in the Ontario case, also tend to be hard for investors to know, so they trade at discounts. Many of Canada’s largest conglomerates, including Canadian Pacific and Imasco, were broken up for that reason.

“The conglomerate model has been found wanting, and a conglomerate controlled by government just doesn’t make sense,” said one investment banker familiar with Ontario’s plans.

Mr. McGuinty stressed Wednesday that he has made no decisions to sell anything.

“We’ve got a responsibility to take a look at all of our assets to make sure that we’re getting the best bang for the buck, and especially now in the context of a global recession and a significant deficit,” the Premier told reporters. “Our responsibility at this point in time is to take a look at our assets and to make sure that they are in fact serving the public interests.”

Mr. Duncan confirmed Wednesday the government retained CIBC and Goldman several weeks ago to assess whether there are better ways to manage the province’s Crown-owned assets.

“This is a preliminary scoping exercise to prepare a plot on which assets could be sold and how; no decisions have been made,” said one senior executive at a Crown corporation, who questioned to remain anonymous because he was not authorized to speak on the government’s plans. He said: “At best, this might translate into options for the next budget, not actual sales.”

But, having started down this road, some analysts expect Mr. McGuinty and his government to follow though with privatizations.

“Ontario will want an early win on this process, something tangible to show voters that the government has a plot for tackling deficits,” said John Sandler, managing director of financial advisory firm Genoa Management Ltd. and an adviser to former federal finance minister Michael Wilson during the sale of Crown corporations Air Canada, Teleglobe and Petro-Canada.

For this reason, along with political considerations, Mr. Sandler and other investment banking sources say the prime candidates for sale are the OLG and Hydro One, as both are relatively straightforward businesses that would attract all sorts of buyers. Government-owned slot machines at racetracks generated $1.1-billion of revenue over the first six months of 2009, the most recent period for which financial information is available. Provincially-owned casinos generated another $719-million. The most recent financial results on lottery sales show OLG sold $2.7-billion of tickets in fiscal 2007. Hydro One was nearly sold in a $5-billion initial public offering in 2002 by Ontario’s former Progressive Conservative government.

Opposition members denounced the provincial Liberals, as did some labour leaders.

“These fire sales of public assets are absolutely a terrible deal for the public,” New Democratic Leader Andrea Horwath said. “These are publicly owned assets that we need to maintain over the long run.”

The former Progressive Conservative government sold off the province’s Highway 407 to a private consortium, but Tory MPP Peter Shurman said that sale was a strategic, one-time event that is not at all comparable to what the Liberals are considering. “This is a non-strategic approach to grabbing money and putting it in the hands of somebody who can’t handle money,” he said.

“Selling off our electricity utilities was a terrible thought under Mike Harris, and it’s a worse thought now,” says Rod Sheppard, president of the Society of Energy Professionals. “These companies are very vital tools in the government’s plans for green electricity and green jobs. They’re vital to bringing Ontario’s economy back from the brink.”