BUSINESS/COVER

TAKEOVER FEVER HITS CANADA

CORPORATE CANADA IS CHANGING UNDER A WAVE OF BILLION-DOLLAR MANOEUVRES

D'ARCY JENISH January 30 1989
BUSINESS/COVER

TAKEOVER FEVER HITS CANADA

CORPORATE CANADA IS CHANGING UNDER A WAVE OF BILLION-DOLLAR MANOEUVRES

D'ARCY JENISH January 30 1989

The announcements came on three consecutive days, the size and scope serving to underline new forces at work on the Canadian business scene. Three unrelated transactions in the Canadian beer, airline and oil industries—with a total price tag of $6.7 billion—allowed victors to claim mighty corporations employing 12,800 workers and holding assets of $5.1 billion. First came the Jan. 18 merger of The Molson Cos. Ltd. and Toronto-based Carling O’Keefe Breweries of Canada Ltd., a $1.6-billion marriage struck between the new management of the Montreal brewer and Carling’s parent, Elders IXL Ltd., the Australian giant that has given Foster’s to the world. Next came the end of a dream—an emotional declaration by onetime Canadian bush pilot Maxwell (Max) Ward that he had sold his company to PWA Corp., owner of Canadian Airlines International Ltd., for $248 million. Finally, on Jan. 20, Exxon, the world’s largest oil company—through its Toronto-based Imperial Oil Ltd.—took over fourth-ranked Texaco Canada Ltd. for $4.9 billion.

Largest: The week of acquisitions—Toronto-based Canada Malting Co. also moved to become the largest firm in its industry by spending $125 million to purchase a rival U.S. malt producer—provoked a flurry of controversy. There was outright approval from those who insist that restructuring and takeovers are the only way for smaller Canadian firms to compete in an increasingly open world market. There was unqualified criticism from some labor leaders and consumer advocates about the twin threats of lost jobs and higher prices. In Ottawa, where a federal agency closely monitors the growing trend of corporate concentration in Canada, there was a sharp warning from antitrust authorities that the deals require approval. Marshall (Mickey) Cohen, president and chief executive officer of The Molson Cos. Ltd. since last October, spoke for the business leaders: “We want to increase our exports considerably.”

Sad: A sad-faced Ward admitted that to survive now requires massive capital: “It is the end of an era”.

Job losses in the three industries could reach several thousand. Edward Kunkel, president of Carling O’Keefe, which employs 7,000 workers, predicted that as many as seven of Molson’s and Carling’s 16 plants across Canada—many of them important employers in smaller communities—could close. In addition to conceding that one-third of Wardair’s 4,500 employees could lose their jobs, Ward said that reduced competition will push airfares higher. Some consumer advocates also said that the Imperial-Texaco merger will push up gasoline and home heating fuel costs by as much as two cents a litre, and put many small, independent service stations out of business because of fewer sources of supply. But said Imperial Oil president Arden Haynes: “The consumers’ interest will be served.”

According to a new survey, the pace of concentration of ownership in Canada is quickening. Last week, Statistics Canada released a report showing that concentration in Canada—its economy already dominated by a small number of elite billionaire families—has increased over the past decade due to takeovers and acquisitions. Calvin Goldman, director of the federal Bureau of Competition Policy, promised a prompt and thorough investigation. “I will not hesitate to take whatever action is required to protect competition in the Canadian marketplace,” Goldman declared in a prepared statement. Later, in an interview with Maclean’s, Goldman made it clear that he was angered because he apparently was not consulted about the airline and brewery takeovers.

If Goldman proceeds on such a course, the companies will likely argue that they had no alternative. Texaco Canada, which has two refiners, 1,800 gas stations and 3,300 employees, was sold largely because its parent company, Texaco Inc. of White Plains, N.Y., had to settle a $3.6-billion lawsuit with Texas-based Pennzoil Ltd. The Molson-Carling merger was based entirely on market forces, according to Cohen. “One of the attractions for us,” he said, “was an experienced international brewer and distributor who could carry the Molson brands places a lot faster than we could”. As for Ward, he said that his company had lost $17.7 million in the first nine months of 1988 and had simply run out of money in its bid to become a regular carrier.

Higher: Although there are approximately 350,000 corporations in Canada, the top 25 firms control 35 per cent of the business assets in the country, up from 30 per cent in 1976. Statistics Canada’s findings were supported by William Stanbury, a commerce professor at the University of British Columbia in Vancouver. His research shows that the 100 largest nonfinancial corporations in Canada controlled about 55 per cent of the country’s business assets in 1986, a far higher degree of concentration than he found elsewhere. Japan’s top 100 nonfinancial corporations control less than 25 per cent of that country’s business assets, while in the United States the corresponding figure is 28 per cent.

Increase: The increase in corporate concentration over the past decade has coincided with a sharp rise in the number of large takeovers. Stanbury noted that, in 1982, there were only two corporate acquisitions in excess of $100 million. The number rose every year until 1987, when there were 47, and last year there were 46 that surpassed $100 million. Since June, major deals have included: Nova Corp.’s $ 1.3-billion takeover of petrochemical Polysar Energy and Chemical Corp.; Dofasco Inc.’s $560-million purchase of Algoma Steel Corp. from CP Ltd.; and the $594-million acquisition of Selkirk Communications Ltd. by Maclean Hunter Ltd.—publisher of Maclean’s— and the subsequent sale of $310 million of Selkirk assets. The largest acquisition in Canadian history was the $5.5-billion purchase last spring of Calgary-based Dome Petroleum Ltd. by Amoco Canada Petroleum Co. Ltd., also of Calgary. The second-largest was last week’s Texaco buy. Similarly, the merger of Toronto-based Dome Mines Ltd. with Vancouver-based Placer Developments Ltd. in mid-1987 created the largest gold producer in North America. Said William Krause, assistant director of Statistics Canada’s industrial organization and finance division: “There has been an increasing trend in the emergence of large Canadian-controlled conglomerates.”

Despite the increase in the number and size of takeovers, many economists and academics contend that Canada’s corporate sector must be restructured in order to compete internationally. Alan Rugman, a respected professor of international business at the University of Toronto, said that there are now about 100 companies worldwide with assets exceeding $40 billion each. In Canada, only about 10 firms have assets surpassing $4 billion, including the top three: Ontario Hydro, Hydro-Québec and Bell Canada Enterprises.

Lockstep: The emergence of so many new corporate giants has occurred in lockstep with the so-called globalization of both marketing and production. Judith Maxwell, chairman of the Ottawa-based Economic Council of Canada, a federally funded research organization, said that some multinational corporations now view Europe, Japan and North America as one huge market, which they call the “triad.” Manufacturers of products as diverse as toothpaste, shampoo, televisions and beer can serve all three geographical areas, said Maxwell.

One of the major factors behind the corporate growth and globalization of the past decade has been government deregulation of business. William Mackness, a former chief economist with the Bank of Nova Scotia who now teaches at the University of Manitoba, said that most governments in the Western industrialized countries have moved away from regulating important sectors of their economies—allowing them to operate more freely and openly than they have in the past. The result is much more intense competition and increased efficiency. Even though this new economic environment has spawned the mega-corporations, he argues, consumers have benefited from price stability and lower inflation, because the firms can operate far more efficiently and spend less battling for market share by swallowing industries that compete in the same sector. But, in the process, such respected and formerly profitable firms as Wardair have collapsed.

Still, many observers questioned whether consumers would benefit in the long run, as corporate power in Canada becomes even more concentrated. Once competition is removed, there will be less of a constraint on the remaining firms to raise prices. The Molson-Carling partnership, which will be known as Molson Breweries, will control 53 per cent of the domestic beer market based on current sales of such popular brands as Molson Canadian, Export and Golden, as well as Carling’s O’Keefe Ale, Old Vienna and Black Label. By comparison, London, Ont.-based John Labatt Ltd., until last week Canada’s largest beer-maker, has been bumped to second spot with a market share of 43 per cent.

While Air Canada will remain the country’s largest commercial air carrier, Calgary-based Canadian Airlines International immediately jumps to a close second by absorbing Wardair. Air Canada employs 22,000 people, operates a fleet of 109 aircraft and controls about 52 per cent of the domestic scheduled market. The combination of Canadian Airlines and Wardair will create a company with a workforce of 18,500, a fleet of 99 aircraft and 48 per cent of the market.

Merging: By acquiring Texaco Canada, Imperial reaffirms its long-held status as the country’s largest oil company. Its assets are currently valued at $9.5 billion, while Texaco’s assets are worth $3.9 billion. Merging the two creates a company with $13.4 billion in assets and, as a result, Calgary-based Petro-Canada falls to a distant second with assets of $8.4 billion. But in a prepared statement announcing the takeover, Imperial disclosed that it has held discussions with Investment Canada—the foreign takeover watchdog—and the federal Bureau of Competition Policy. If necessary, said Imperial in a news release, it would sell off service stations and bulk terminals to ease worries about corporate concentration.

Imperial operates a network of 3,100 service stations across the country under the trade name Esso, while Texaco owns 1,800 stations. A Texaco official said that Imperial may sell as many as 1,000 Texaco outlets, located in British Columbia, the Prairies and Atlantic Canada, but will likely keep the Ontario and Quebec stations. The official also said that reports have circulated within Texaco that Imperial has already lined up prospective buyers. Calgary-based Chevron Canada Resources Ltd. will take the B.C. stations, while Calgary-based Husky Oil Ltd. will buy the Prairie outlets. Prospective buyers of the Atlantic stations include Toronto-based Ultramar Canada Inc. and Irving Oil Ltd. of Saint John, N.B.

Although Imperial is committed to selling some of the Texaco assets, it has promised to keep all Texaco employees on its payroll for at least two years. But some outside observers contend that the guarantee will merely cover a transition period and that, once the two companies are merged, layoffs will be inevitable. Denis Mote, oil and gas analyst with the Toronto-based brokerage firm Maison Placements Inc., said: “You don’t need two presidents, two marketing managers and two head offices. There will be some fallout.”

Dramatic: The most dramatic effect of the Molson-Carling merger will likely be the closure of several small breweries across Canada. Under existing provincial regulations, beer-makers must operate a brewery in a province if they want to sell there. As a result, Molson currently operates nine breweries in seven provinces, while Carling has seven plants in as many provinces.

While the Molson and Carling breweries will merge into one corporate entity, Wardair may survive as a separate division of Canadian Airlines catering to the holiday charter market. Ward will remain chairman of Wardair, and George Curley will continue as president.

Wardair’s losses in the first nine months of 1988 were $17.7 million, compared with $15.9 million for all of 1987. Ward said that the continuing losses, combined with intense price competition and the high cost of new aircraft, finally convinced him that he could no longer operate independently. Said Ward: “Quite frankly, we just didn’t have enough money to hold out for the additional year to a year and a half it would take to turn Wardair into a regularly scheduled carrier.”

Canadian Airlines, through its parent company, Calgary-based PWA Corp. Ltd., is buying all the outstanding Wardair shares at $17.25 each for a total of $248 million. Ward, who founded the company 35 years ago as a bush operation serving remote northern communities, will receive more than $70 million from the sale. The Imperial acquisition of Texaco is an equally straightforward cash offer to buy all the outstanding common shares at $41.23 apiece. Texaco Inc. owns 78 per cent of the stock in Texaco Canada.

The Molson-Carling merger was a different deal. The Molson Cos. and Carling O’Keefe Ltd. each will own half of the new Molson Breweries. But Molson’s brewing assets are valued at $1 billion compared with Carling’s $560 million. To equalize the investments, The Molson Cos. will be able to withdraw $440 million in cash from the brewing company.

Major: Although Canada is now a country with just two major breweries, Elders chairman John Elliott insisted that similar consolidations in Australia, the United States and some European companies had produced more intense competition among the larger, stronger survivors. Similarly, Ward said that Canadians will be better served by two strong national airlines, although prices will likely increase with one less company competing for passengers—especially because Wardair was one of the industry leaders in discount fares. As for the Imperial-Texaco merger, some analysts say reducing concentration will lead to higher gasoline and fuel-oil prices. While questions about the impact of the mergers will linger, perhaps for months, Canadians can be certain that they have witnessed a dramatic restructuring of three major industries, as Canadian business moves farther onto the world stage.