A bidding war could erupt for the Towers
department store chain run by Toronto's Oshawa Group Ltd.
Byline: KENNETH KIDD
BY KENNETH KIDD, Retailing Reporter
Giant Woolworth Corp. of New York said late yesterday it wants a chance to bid
on the 51-store operation, and expressed surprise that it wasn't asked.
That came after Toronto-based Hudson's Bay Co. had confirmed it is negotiating
to buy Towers, whose stores would be renamed and merged with the Zellers Inc.
chain of Hudson's Bay.
But rival Woolworth, which operates 146 Woolco department stores in Canada,
delivered a letter to Oshawa Group yesterday, asking to join the fray.
"In fairness to your company and its shareholders," the letter said, Woolworth
wants all the same information already given to Zellers and the chance to make a
bid.
Oshawa Group officials were unavailable late yesterday and a Hudson's Bay
executive declined to comment on the Woolworth move.
Earlier, Oshawa Group and Hudson's Bay had confirmed press reports about a deal.
They said a letter of intent has been signed on a sale, which could close next
month.
"It's not a done deal," said Gary Lukassen, executive vice-president and chief
financial officer at Hudson's Bay. "We have some hurdles to overcome."
"At this point, there is still a lot of discussion to take place," added Sam
Crystal, spokesman for Oshawa Group.
Neither side would elaborate.
Analysts said a takeover of the Towers and Bonimart chains by Hudson's Bay would
be a blow to consumers and developers already suffering because of the retail
industry's concentrated ownership.
"There's one less store to start a price war," said John Winter, president of
John Winter Associates Ltd. "If you're a developer, it's an agonizing blow
because there's one less store to anchor your new plaza."
After swallowing Towers, the Zellers chain would control roughly half the
so-called junior, or discount department store market in Canada.
A takeover - estimated by analysts as costing Hudson's Bay $100-million or more
- would have to be blessed by the federal Bureau of Competition Policy.
Montreal-based Zellers now has a 15 per cent share of all department store sales
in Canada, including those by traditional, full-line department stores. By
swallowing Towers, Zellers would move to 18 per cent, ahead of Toronto's T.
Eaton Co. Ltd. and just behind the 20 per cent market share held by Sears Canada
Inc. of Toronto. (The Sears figure excludes its catalogue sales).
But at the junior, discount end of the market, the Zellers share would be
roughly half with the addition of Towers, Mr. Winter said. And its main
competition would dwindle to just two chains: K mart Canada Ltd. of Brampton,
Ont., and the Woolco chain.
Mr. Lukassen, however, countered that Zellers also competes with the likes of
Toronto-based Canadian Tire Corp. Ltd., which isn't classed as a department
store, as well as with all the specialty retailers.
Since the junior stores advertise heavily through flyers inserted in newspapers,
publishers may lose some revenue because of the takeover, Mr. Winter said.
But Ross Cowan, analyst at Levesque Beaubien Geoffrion Inc., argued Zellers may
beef up its advertising in at least the Metro Toronto market. One of the
takeover's attractions to Hudson's Bay is that it allows Zellers, with 208
stores nationwide, to boost its presence in the Toronto market, where Towers has
12 stores.
"They came to us with an offer," said Oshawa Group's Mr. Crystal. "It wasn't on
the block or anything like that.
"The transaction makes sense for them," he added. "The Bay's whole thrust is in
general merchandise. Our major emphasis is in food and drug stores."
The 51 Towers outlets in Ontario, the Maritimes and Quebec (where they are
called Bonimart) generated revenue of $553.3-million in the fiscal year ended
Jan. 27, 1990. Oshawa Group's total revenue that year - including the Food City
and IGA grocery business, the Pharma Plus and Kent drug store chains - was
$4.9-billion.
The price Hudson's Bay will pay for Towers is likely between $75- million and
$100-million, according to analysts.
Barry Gruman, analyst at First Marathon Securities Ltd., arrived at that range
based on an estimated book value and inventory. But he said the final price
could end up higher, because Towers will be carrying large, pre-Christmas
inventories.
One source familiar with the negotiations said no real estate is involved in the
sale.
Although Towers does not publish separate profit figures, Mr. Cowan estimated
the chain last year earned a profit of $12-million to $15- million before
interest and taxes, or slightly better than 2 per cent of sales. (Zellers profit
before interest and taxes equalled 8.4 per cent of sales last year.) Based on
that profit estimate, and a price multiple of 6.5 times earnings, Mr. Cowan also
put a price tag on Towers ranging up to $100- million.
"If you look out a year or three, you'll end up saying it was a superior
purchase for (Hudson's Bay)," Mr. Gruman said.
While the addition of Towers will help fill some holes in Zellers' market
coverage, there are a few overlaps. At a site in northwest Toronto, for
instance, Zellers has opened a new store only a stone's throw from an existing
Towers.
There are "a few" similar overlaps, Mr. Lukassen said. But he would not discuss
possible store closings or job losses.
The Towers"Bonimart chain has 35 outlets in Ontario, 10 in Quebec and six in the
Maritimes, with a total of 6,100 employees. Like Zellers, it has virtually no
unionized workers: only two Bonimart locations have unions.