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Reitmans Eyeing an Acquisition?

The other day while reading a post by the moneygardener on Canadian clothing retailer Le Chateau (CTU.A) a thought came to mind as I placed the stock on my DivG watchlist and began some initial research on the dividend paying stock. As a shareholder of Reitmans (RET.A) I naturally began drawing comparisons to Le Chateau’s operating results, product portfolio and competitive inroads made in the retail space of Canada and the US.

As sales continue to lag at Reitmans and rise impressively at Le Chateau; would Reitmans possibly be eyeing an acquisition of the smaller Canadian retailer in order to fill a niche need among their current banners and operations?

Reitman’s currently trades at a market cap of just over $1.1B with Le Chateau trading at $348M. Reitmans strong financial position certainly makes the thought interesting as they have only $13M in long-term debt and adequate cashflow to cover both the dividend and any additional debt. Le Chateau in recent years has been an impressive sales gainer with a 9.6% annualized increase over the past 5 years. Contrast that with Reitmans 4.8% increase in sales over the same time period and the incentive for growth becomes clear.

Reitmans operates 900 stores across Canada including the banners: Reitmans, Smart Set, RW & CO, Thyme Maternity, Penningtons, Addition Elle & Cassis. If you were to add Le Chateau’s 209 existing stores in both the US & Canada and nearly 1 million square feet of retail space to Reitmans portfolio you’d immediately acquire exposure to a key demographic. Reitmans has a long established goal of being a dominant operation in Canadian retail and they’ve struggled recently with their Cassis banner to attract the younger, high discretionary spending demographic that Le Chateau & Lululemon have been making significant progress with. Le Chateau would further diversify their portfolio of banners and add consistently rising sales, cashflow and profits to Reitmans’ bottom line.

The clear barrier for any of this happening is the dual class voting structure of Le Chateau where each B class share carries 10 votes per share in comparison to the one vote per share for the A class shares. Le Chateau pays an impressive 5% dividend and trades at a forward P/E of less than 10x 2009 earnings. Convincing any investor, let alone the management of the company, to consider an acquisition would likely require a substantial premium to the current share price: approximately $20 per share by my calculations.

That premium though in the context of what Reitmans currently is lacking could be of significant long-term value to the company considering the current concerns over retail sales and the ability of the consumer to spend. Acquiring Le Chateau in a down phase of the market would certainly be less expensive than if Reitmans were to wait for the consumer to rebound in the next few years.

Ultimately the two might not be a fit for each other, but sometimes thinking outside the box gives you a unique perspective that’s worked out in my favour on more than one occasion. I wouldn’t be surprised if we hear speculation in the next 12-24 months of increasing interest being expressed towards Le Chateau from market analysts.

What Do You Think: is Le Chateau is a fit for Reitmans?

Disclosure: I hold shares in RET.A

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{ 2 comments… add one }
  • MG (moneygardener) September 12, 2008, 9:43 am

    Plausible, but that is a giant acquisition. I agree with your thoughts here. There would likely be good synergies as well to save come SG&A costs. Consolidation within industries seems to always happen over time so I wouldn't be surprised. Another good point you raise is the timing, retail is hated right now.

  • Nurse B, 911 September 12, 2008, 9:51 am

    It would no doubt be very large, but I think it fits an obvious need for Reitmans – the question is does CTU.A want to be a part of something larger or simply continue on their current path. The stock has done very well in recent years (counting special dividends) so the incentive for shareholders & management to consider any deal would have to include a significant premium.

    Retail is hated right now and I wouldn't rule out even a large US retailer expressing interest in Le Chateau for the right price.

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