Yankee Doodle retail
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Font: * * * * Sean Silcoff, Financial Post
Published: Saturday, December 23, 2006
Without a doubt, we are really seeing the Americanization of the Canadian retail sector. If they haven't bought it (The Bay), they've built it (Home Depot). And with the world awash in private-equity money and cheap credit, more potential foreign buyers have put Canadian retailers on their radar screens.
In October, 2000, Mitch Goldhar, Wal-Mart's Canadian real estate developer, declared that within five years "all retailers serving Canada on a national basis will be foreign owned."
His timing may have been off, but Mr. Goldhar nailed the trend. In the past six years, foreigners have bought some of Canada's biggest and best-known retailers, including Dollarama, Future Shop, yoga wear merchant Lululemon Athletica and, this year, Hudson's Bay Co., lingerie seller La Senza and jeans maker and retailer Buffalo Group.
If they haven't bought, they have built. New entrants include European banners Zara and H & M and U.S. favourites Pottery Barn, Abercrombie & Fitch, and Build-A-Bear Workshop. Some, such as Apple, have been awed by the high volumes in their Canadian outlets. More chains are coming, including Lowe's and Crate and Barrel.
Much has obviously changed since Wal-Mart and Home Depot entered Canada in 1994, not least that Canadians have learned to expect better from their retailers.
Now that shoppers have become better served, investors are starting to benefit as well. Thanks to the eye-popping sums paid, in particular, $1-billion for Dollarama in 2004 and $710-million for La Senza this fall, and the strength of the Canadian economy, retail has ended its long drought as one of Canada's most moribund sectors for investors.
Across the country, merchants have begun doing the back-of-theenvelope calculations to figure out what they could get for their businesses if they were to sell or take on partners. That is, if a slew of eager private equity firms and investment banks haven't beaten them to it.
"I don't think there is a retailer in Canada who wouldn't sell" for the price that lingerie merchant La Senza received from Victoria's Secret owner, The Limited Brands, said one senior retail industry veteran in Montreal.
That deal valued La Senza -- which operates 318 stores in Canada and has 327 licensed outlets in 39 countries -- at an impressive 9.3- times the ratio of the firm's enterprise value to operating profit.
Receiving Christmas cards is nice, and gift cards are even nicer, judging by their growing popularity
way of the U.S. mass merchant juggernauts, honing in on niches they could dominate. Some managed to break the curse of Canadian retailers past by thriving beyond Canada's borders. Alimentation Couche-Tard Inc. has grown into the second-largest independent convenience store operator in the United States, while La Senza and shoe merchant Aldo Group have franchised stores around the world. Bath and beauty retailer Fruits & Passions has franchised 60 outlets in Asia, Europe and Mexico (in addition to its 90 in Canada) and sold its branded products to some of the world's great department stores, including Harrods and Nordstrom.
But the retailers marking these recent successes, which have put Canadian retail on the global map, are also the very ones most likely to have foreign owners calling the shots before long. Jean Hurteau, chief executive of Fruits & Passion's parent company, shrugs off that likelihood. After selling 30% of the company to Quebec's investment arm this year, "I would say [for our next round of financing] it's definitely going to be an international investor," he said. "We need someone that will bring that international dimension and access to real estate."
And in the end, is that such a bad thing? Canadian merchants are cashing out, shoppers are getting more choice, and space once occupied by lumbering, poorly performing domestic retailers has been released to better shops. Save for the odd Canadian sentimentalist, the changes have been good for everyone.
Many industry observers say the deal is unique as it pairs two rivals with complementary operations, giving Victoria's Secret a platform to expand globally. At the same time, however, it points to huge value premiums Canada's "best-in-class" retailers could fetch if sold. "There are idle conversations going on," the source said. "Everybody gets turned on" by the La Senza deal. "This will vibrate. There are people in play."
One top Montreal mergers and acquisitions lawyer said "investment bankers are calling the retailers and effectively giving them the message there has never been a better time than today to sell out. I know that for a fact. If they haven't been calling, some of the retailers have been calling and saying, 'What can I get for my company?' "
One firm that is on the block is fashion retailer Le Chateau. The Montreal-based company traded hands this week in the range of $58 to $60 per share. But a buyout offer similar to that for La Senza could value Le Chateau for as high as $80 a share, Versant Partners analyst Neil Linsdell said.
Other retailers say they've fielded far more calls lately from possible buyers talking of similar premiums to be had. The president of one growing Canadian fashion retailer with more than 200 stores said the company used to get "about one call a year" from potential suitors. Since early 2005, "we get a call once every couple of weeks. They probably literally walk through malls trying to figure out who to pick up the phone and call."
Many merchants, including Stephen Bebis, chief executive of the 28-store Golf Town Income Fund, say their firms aren't for sale. But they openly talk about likely suitors, which suggests they are open to deals, at the right price. Shares of Markham, Ont.-based Golf Town, said Mr. Bebis, would "definitely be selling for more than we are today" if a suitor was in the wings, "Without question, Dick's Sporting Goods would be a perfect strategic partner" for Golf Town, which had $215-million in sales in its last four quarters.
Pittsburgh-based Dick's recently paid 11-times operating earnings for fellow U.S. retailer Golf Galaxy. At that multiple, Golf Town, which is more profitable than Golf Galaxy, would sell for more than a 50% premium to its recent value of $13 per unit.
Others are equally coy. "If someone were to make an approach with numbers we thought were appropriate, it would gain our attention and we would look at it," said Jeremy Reitman, CEO of Montreal-based fashion retailer Reitmans Canada Ltd., one of Canada's largest specialty chains. "I think there have been some very interesting deals out there."
The internationalization of Canadian retail has only begun. More U.S. chains are on their way. And with the world awash in private-equity money and cheap credit, more potential foreign buyers have put Canadian retailers on their radar screens.
"The reality is you've got some phenomenal retailers," said Tom
Financial Post ssilcoff@nationalpost.com Stemberg, former CEO of Staples Inc., and now a venture partner with Lexington, Mass.-based Highland Capital Partners, which paid US$93-million along with another U.S. private equity firm in 2005 for a 48% stake in Vancouver-based Lulu lemon. "I spend an awful lot of my time in Canada looking for opportunities."
The retailers and buyout firms see a Canadian economy that is strong -- and possibly more resilient than the economy of the United States, where consumer spending could be hit by a fall in housing prices. Private-equity firms have already done a round of buyouts there, but in Canada there remains a healthy complement of merchants that are expanding and carry valuations that are lower than their U.S. peers. The retail sector is also less competitive than it is in the United States, which has more stores per capita. Meanwhile, Canadian department stores have not roared back to health as they have to the south. As a result, there are many opportunities for the picking.
"There is definitely an eagerness to invest in the sector, but it's not a blind interest," said Kevin Callaghan, managing director of Boston-based Berkshire Partners, which put $100- million last year in Aritzia, a Vancouver- based women's apparel chain. "People want to buy the winners. It's in markets like these that good companies are available."
All that is missing are Canadian buyers. There are few private-equity firms of any consequence in Canada. That doesn't bother Mr. Stemberg much. "There are more ideas than there is capital up there," he said. "I don't know why, but I like it."
It's hard to believe these people are talking about Canada. In the dark ages of retail, before the arrival of Costco, Wal-Mart and Home Depot in the early 1990s, shopping in Canada was a depressing experience, dominated by large, datedmass merchants. Being underserved seemed like a civic duty. But many of the retailers that either came of age or began in the Wal-Mart era are today's savviest and fastest-growing players, including La Senza, Dynamite Group (operator of the Dynamite and Garage banners), Dollarama and handbag merchant Bentley. They learned quickly to get out of the
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