THE EPIC SIRUGGLE
Saturday morning shopping trips to the local Canadian Tire store for anything from car batteries to fishing rods have been a ritual for many Canadians for decades. It is a tradition that has its own distinctive stamp: the blue, green and pink “funnymoney” premium coupons that accumulate in glove compartments, kitchen cupboards and purses—and are even redeemed for more hardware. But in recent months the Canadian Tire Corporation Ltd. (CTC) itself became the object of a shopping expedition that involves millions of dollars in real money. The venture by 348 owner-operators of Canadian Tire retail stores to buy control of the parent wholesaler at times became as hectic as a red-letter sale day in the stores they run. The struggle for the firm since last April has featured angry resistance from cofounding patriarch A. J. Billes—and from 13,819 nonvoting CTC shareholders—to a move by 84-year-old A. J.’s rebellious children to sell off the family merchandising empire. Then, last week, the Ontario and Quebec securities commissions ruled against the dealer takeover. Said the senior Billes: “Thank God. You bet I am happy.”
Stung: The three adult Billes children, who control CTC’s voting stock, and the dealers attempting to take control were left in an unhappier situation. Although Alfred, David and Martha Gardiner Billes together had received $30 million in a non-refundable down payment from the dealers, they had stood to receive $270 million in all. Alfred and David were expected to join in appeals against the securities ruling in Ontario and Quebec courts. Martha’s next move was uncertain. The ruling opened the possibility of rival takeover bids. But while the Billes children and the dealers were stung by the ruling, representatives of the 13,819 owners of nonvoting Class A CTC shares were jubilant. Those shareholders were to have been excluded from any compensation in the takeover.
The decision, said Montreal investment counsellor Stephen Jarislowsky, upholds the rights of millions of Canadians who have purchased nonvoting shares, either directly or through pension funds. Added William Allen, a To-
ronto investment dealer: “The decision has sent a signal that you have to abide by the fundamental rules of business, which are fairness and decency.”
For his part, David Billes said that the message from the securities commissions was clear. Added Billes: “We thought it would go through. But we have been told we have to look after the Class A shareholders and the best interests of the corporation.”
For the Canadian Tire dealers, whose lawyer, Peter Dey, had argued that the marketplace, not the commission, should decide the issue, the outlook remains uncertain. After rumors had circulated that the Billes family wanted to sell its controlling 60.9-per-cent inter-
est in CTC voting shares, the dealers had demanded at their biennial convention last September in Halifax that the family clear up the growing uncertainty. Both Alfred and Martha assured them that the family shares were definitely not for sale. But behind the scenes a different saga was unfolding. Last April, Alfred had been approached by Roderick Mclnnes, president of the Toronto-based Carling O’Keefe brewing company, over the possible sale of Al-
fred’s CTC shares, and several letters were exchanged. Finally, on Oct. 15 the Billes brothers told the dealers that they planned to sell out.
Reports quickly spread in Toronto’s financial district that the firm was for sale and, according to testimony before the securities commissions, four other offers were soon put forward. Torontobased Cara Operations Ltd. proposed to amalgamate its fast-food restaurants with CTC. Canadian Tire itself proposed a restructuring that would buy out the brothers. And one unidentified bid was made.
But the first major, and apparently acceptable, proposal arose in early December when 348 of Canadian Tire’s
361 dealers offered $160.24 a sharefour times the market price of the shares at the time—for 49 per cent of CTC’s 3.4 million common shares. But that plan enraged the owners of 84.4 million Class A nonvoting shares. Spokesmen for those shareholders argued before the nine-day securities hearing in December that their interests were protected under a company bylaw. The bylaw states that if the majority of the common voting shares are
acquired, the nonvoting stocks become voting shares—and in the process could become far more valuable. The securities commissions agreed, and blocked the dealers’ takeover plans.
Fight: The controversy over Canadian Tire’s ownership is the culmination of the most turbulent decade in the company’s 60-year history. In 1979 CTC tried to buy 30 per cent of Australia’s largest hardware chain, McEwan’s Ltd., but eventually abandoned its quest for control when financial losses mounted. The Australian move was followed by a disastrous foray into the U.S. market in late 1981, when CTC purchased Texasbased White Stores Inc. CTC lost an estimated $300 million on the venture
and in June, 1985, fired its president of 19 years and architect of the White Store plan, Dean Muncaster.
While attempting to sell White, the company also had to fight off a takeover bid from the Montreal-based tobacco and retail conglomerate Imasco Ltd. In the midst of the failed expansions abroad and the takeover fight, two branches of the founding Billes family waged a battle for control of the company, in which A. J. Billes’s children were victorious. But despite the turmoil, Canadian Tire continued to expand and posted record sales and profits every year between 1977 and 1985.
Roots: During that
period the company also cemented its position as one of Canada’s top retail chains. The embattled firm traces its roots to September, 1922, when brothers John W. and Alfred J. Billes launched the Hamilton Tire and Rubber Co. The brothers had pooled their meagre savings of $1,800 and bought a small garage located on Hamilton Street in central Toronto. Their inventory consisted of a few automobile parts, tires and batteries. At the time there were just 40,000 cars on the streets of Toronto.
Within a year the Billes brothers had moved their store twice, and in 1926 they decided to capitalize further on
0 the growing auto trade.
1 They mailed a merchan£ dise price list to every £ car owner in the province. And in 1927, to help
consumers identify with
their trend-setting auto-parts business, they renamed the company Canadian Tire Corporation Ltd. The Billes family laid the foundation of both their management philosophy and the current coast-to-coast chain of outlets in 1934 when they opened their first associate store in Hamilton, Ont. They were not content to simply install a branch manager. Instead, the brothers wanted an entrepreneur who would be responsible for all the internal operations of the store while being sensitive to local demand. As a result, it became one of the first firms to introduce the concept of the dealer-owner—he would own both his store and merchandise, although it was purchased from the parent compa-
ny. The concept was successful, and by 1940 the family had 105 stores.
But more than just their novel management-owner concept was behind their success. They also displayed a flair for promotional gimmicks. In 1937 clerks on roller skates began serving customers at CTC’s main store on Yonge Street in Toronto, and in the 1950s and 1960s one-stop car-servicing jobs and Canadian Tire premium coupons were added to the list of consumer draws.
Novel: By September, 1944, the year Canadian Tire first went public with an issue of 100,000 common shares, the company was carrying its own brand of auto supplies. That was also the year that CTC made a novel and eventually highly lucrative business decision. By diversifying its product line away from automobile accessories and parts to include sporting goods, tools and such household goods as paints, varnishes and enamels, the store suddenly became a one-stop hardware mecca.
Over the next decade company president John W. Billes was able to tell successive annual shareholders’ meetings that the new concept was working. CTC managed to chalk up sales increases of at least 15 per cent annually and generate record profits nearly every year. With more potential owner-
managers wanting to buy into the thriving chain, it grew quickly, and by 1955 there were 135 CTC stores in Ontario and the Maritimes. But tragedy hit the high-flying family in November, 1956, when J.W. Billes died of a bone marrow disease. His younger brother,
A. J. Billes, who was told by doctors that his heart was in such bad condition that he would likely die within
10 years, took over as company president. He quickly made several remarkable innovations of his own. He introduced a profit-sharing plan under which employees are awarded between
11 per cent and 20 per cent of their annual salary in the form of Class A nonvoting shares, leaving the family with voting control.
Slip: It was not until 1966 that the family’s personal management of CTC finally started to slip. That year Alfred J. Billes announced his resignation as president, but said that he would run the employee profit-sharing plan. But a longtime executive who has since departed said that Billes left the presidency for other reasons. He said CTC had gone through a period of stagnation and Billes realized that new management was needed to revitalize the flagging company. But the new chief officer would not be picked from among his three children. Instead he appointed Joseph Dean Muncaster, then just 32, as his successor.
The son of a CTC dealer in Sudbury, Ont., Muncaster began his retailing career as a $15-a-week stock boy in his father’s Canadian Tire store. He later attended the University of Western Ontario in London and Northwestern University in Chicago. After graduating with a master’s degree in business administration, he joined Canadian Tire in 1957 as a financial analyst, and by the time he became president Canadian Tire had grown to 224 stores and annual sales surpassed $100 million.
Rapid: After more than a decade of rapid expansion and uninterrupted success under Muncaster, CTC hit a roadblock in 1980. It had run out of growth opportunities in Canada, and the board of directors decided to duplicate Canadian Tire in the United States. After scouring the market, CTC acquired White Stores Inc. of Wichita Falls, Tex., in late 1981 for $47.8 million. The chain consisted of 81 company-owned stores, located primarily in Texas, and more than 400 dealer-owned outlets scattered across a dozen Sunbelt states. Canadian Tire immediately began implementing its retail formula. New advertising campaigns were launched, a catalogue was printed, stores were refurbished and 11,000 items added to the product lines. Still, in 1982 White Stores lost $10 million, and by 1984 annual losses had escalated to $55 million.
As sales fell due to stiff competition and poorly located stores, so did Muncaster’s credibility. He was fired by the board just minutes before he addressed the company annual meeting in June, 1985. The firm had invested $300 million in White Stores, and it eventually
sold the chain to Wesray Capital Corp. of New Jersey in February, 1986. A. J. Billes blames Muncaster for the U.S. failure. For his part, Muncaster declined to comment.
Sell: While CTC was losing money in Texas, the company was also rocked by the Billes family ownership struggle (page 30). The roots of the contest were the long-standing policy of maintaining family control which had been diluted through inheritances. A. J. Billes gave his shares to his mother and two sisters, who in turn bequeathed them to his children. And J.W.
Billes, at the time of his death, left his shares to 23 charities which, in 1983, proposed to sell out. That same year Imasco made a bid to purchase the retail chain. “Canadian Tire was a marvellously managed business,” said Imasco chairman and chief executive officer Paul Paré. “The company was 10 years before its time in taking good merchandise from suppliers and distributing it through a system that was the most automated in the world.” Imasco reportedly offered both common and Class A shareholders the equivalent of $75 per share—a bid worth $1.1 billion in all.
But A. J. Billes’s children kept CTC in the family’s control when they refused to sell their shares. As well, the cofounder convinced the dealers and the employees to side with the family. “The dealers rejected the offer after they were assembled by A. J. Billes,” said Paré. “He was called into the fray and said to the employees and dealers, ‘Let’s stay as a family.’ ” The issue of whether the charities could sell their shares went to the Supreme Court of Ontario, which eventually ruled that the CTC shares in the J.W. Billes estate could be sold. As a result, Alfred Dickson (Dick) Billes, who is now a dealer, wound up bidding against his three cousins for his late father’s shares. In October, 1983, the cousins prevailed with a bid exceeding $76 million, which gave them almost 61 per cent of the common shares.
With the battle for the J.W. Billes shares resolved and the Imasco takeover bid defeated, the Canadian Tire board decided to amend the company bylaws to protect nonvoting shareholders in any future takeover. The board adopted a protective measure which has become widely known as the coat-
tail provision. It stipulates that if an offer is made for all the voting shares, and a majority are tendered, then the nonvoting shares become voting equity. Anyone making a bid for Canadian Tire would be forced to make an equal and—following last week’s decisionmassive offer to all shareholders.
Last Oct. 15, CTC announced that Alfred and David Billes wanted to sell their 40-per-cent voting stake. The four offers were made, but in the end only the dealers’ offer was seriously considered. The Billes children agreed
to tender their shares, but the dealers intended to purchase only 49 per cent of the outstanding common stock. By aiming at 49 per cent, the dealers were trying to avoid triggering the coattail provision at 50 per cent. The proposed deal created an uproar in the investment community because the Billes family was being offered $160.24 per share, four times the market value, while nonvoting shareholders were ignored.
Deal: And the dealers’ proposal aroused skepticism among some retail industry analysts for other reasons. Gordon Capital Corp. acted as the agent, for a fee rumored to be in the $l-million range, and persuaded the dealers to maintain a strict silence about the offer. Montreal analyst Martin Kaufman noted that by offering $272 million for the Billes holdings, the average dealer would be forced to borrow between $750,000 and $800,000. Annual service charges would amount to about $80,000. Toronto-based retail analyst David McCracken said, “We heard there are 160 dealers who are not even in the deal.” However, they were silenced by threats that they
would be ousted if the offer went through.
But Yarmouth, N.S., dealer Ernest Schoenhoeffer said that he and his counterparts across the country unanimously supported the offer. They were contacted individually in late November by executives of CTC Dealer Holdings seeking support. “At that time nobody had any idea about price,” said Schoenhoeffer. “The dealers have always felt the company would be better under our control.” Many were apprehensive about the debt they would run up through the takeover, but they said that the only alternative was to let an outside interest take control. “If an outsider bought it, he would have to liquidate part of the company because the price would be too high to keep it as is,” said Schoenhoeffer.
Renew: By the end of last week, Canadian Tire’s ownership problems were far from resolved. Analysts said that it seemed evident that any future takeover would have to include s the nonvoting share§ holders. That would § mean that a successful bid would have to be in - the order of Imasco’s $12 billion offer for control in 1983. Still, the problem of satisfying the expensive coattail provision has not daunted Cara. Within minutes of last week’s ruling, the food chain said it still planned to pursue the company. Cara’s executive vice-president, Michael Maguire, said that the firm would renew its offer for the company, and wanted to meet the Billes family to discuss it.
Despite the uncertainty, former CTC president Muncaster said that retail sales will not be hurt, but he acknowledged that the company’s management could become preoccupied by takeover issues at the expense of efficiency. Said Muncaster: “They certainly might not get things done as well.” David Billes, for one, is already preoccupied with real-money questions. In the wake of the family’s failed bid to sell control of the family firm, and with new suitors already lining up, he told Maclean's that his objective now was to consider his options. Said Billes: “I will have to sit down and think it all through.”
— D'ARCY JENISH with ANN WALMSLEY and THERESA TEDESCO in Toronto and BRUCE WALLACE in Montreal