Leon’s plan to buy The Brick aims to thwart U.S. retail threats

TORONTO – Storied Canadian furniture retailer Leon’s is buying high-profile rival The Brick in a $700-million friendly deal aimed at fending off U.S. competitors making inroads in Canada.

With American retail giants such as Walmart and Target threatening their share of the marketplace, the two Canadian companies announced Sunday a deal that would see Leon’s take ownership of The Brick but operate the two under separate banners.

The deal also comes amid a tough economic climate for furniture retailers with a number of factors, including a softening housing market, taking a toll on sales.

In a joint release, Leon’s Furniture Ltd. (TSX:LNF) says it will pay $5.40 per share. Friday’s closing price on Brick (TSX:BRK) stock on the Toronto Stock Exchange was $3.50.

The two chains are facing new competitors, chiefly in the form of American retail giant Target, which plans to begin opening up to 135 stores across Canada in the coming year. Walmart is adding 73 stores across Canada in the coming months, including 28 former Zellers stores.

The acquisition of The Brick would will strengthen Leon’s position in the home furnishing marketplace, said Leon’s CEO Terry Leon in a release.

“During these economic times where we have seen multiple American corporations make inroads in our country through acquisitions, it is a pleasure to see two successful Canadian retailers reach such an agreement that will better serve Canadian consumers,” he said.

“Our combined team will have access to national buying opportunities in merchandising and marketing, and a national distribution network that will enable us to greatly enhance our online shopping capabilities.”

Other major Canadian retailers such as HBC, Shopper’s Drug Mart and Jean Coutu are also making preparations, either through restructuring or how they do business, to prepare for the competitive threat of Target.

Leon will remain CEO of Leon’s and become CEO of the combined company. The Brick’s president and CEO, Vi Konkle, will continue as president of The Brick, the companies said.

“We welcome this opportunity to partner with this iconic corporation,” Konkle said in the release.

“By joining forces, we can strengthen both of our businesses, enhancing everything that has made Leon’s and The Brick two of Canada’s best-known retailers and preserving The Brick’s roots in Edmonton.”

Toronto-based Leon’s hopes to close the deal, which it values at approximately $700 million, in the first three months of next year. The offer is subject to approval by Brick shareholders and will need court and regulatory approval.

For its second quarter, Leon’s reported a nearly 20 per cent drop in earnings compared with a year ago as its marketing costs rose. The retailer is scheduled to report its third-quarter results this week.

The Brick reported a net loss of $3.1 million, or three cents per share, in its second quarter compared to a net profit of $6.4 million or 12 cents per share in the same period last year. The company said the loss included a one-time payment of $17.1 million related to a debenture redemption. It also reports its third quarter results this week.

Brick shareholder’s can choose to receive $5.40 in cash per common share or 0.0054 convertible debentures of Leon’s. The holders of outstanding common share purchase warrants can choose to receive $4.40 in cash per warrant or 0.0044 convertible debentures per warrant.

The deal has the backing of Brick founder William Comrie, Fairfax Financial Holdings Limited, Chou RRSP Fund, and Bill Gregson, the executive chair of The Brick’s board of directors, the companies said.

Together, they hold some 66.6 per cent of the outstanding common shares and warrants of The Brick.

Leon’s, founded in 1909 and headquartered in Toronto, has 76 stores with locations in every province except British Columbia.

The Brick, which is based in Edmonton where it opened its first store in 1971, has 230 stores operating under The Brick, United Furniture Warehouse, The Brick Mattress Store and Urban Brick banners.

The two companies have scheduled a news conference for Monday in Toronto to discuss the deal.

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