Detailed Analysis: Canadian Tire Acquires Mark’s Work Wearhouse

Canadian Tire will now be able to offer the Canadian marketplace the Pros, the Parts, the Price and now the Pants, with its acquisition of the Mark’s Work Warehouse chain.
Canadian Tire Corporation, Limited (CTC) and Mark’s Work Wearhouse Ltd. announced an all cash offer by Canadian Tire for all of the outstanding common shares of Mark’s Work Wearhouse at a price of $4.10 per share.
CTC president and CEO Wayne Sales says this offer is an important step forward in the execution of Canadian Tire’s Strategic Plan by adding a strong, well-performing and profitable growth company to its integrated portfolio of businesses.
“Both Mark’s Work Wearhouse and Canadian Tire are unique in the marketplace with a customer offering focused on goods for everyday use. This is a strong strategic and financial fit. The combination of Canadian Tire’s hard goods expertise and Mark’s work and work-related casual apparel and footwear expertise, targeting common customer segments, will provide tremendous opportunities to leverage the strengths of both organizations,” said Sales.
The acquisition cost of $116 million will be funded from existing cash holdings. The offer was made pursuant to a Support Agreement signed between Canadian Tire and Mark’s Work Wearhouse.
The board of directors of Mark’s Work Wearhouse has unanimously agreed to support the offer as in the best interests of its shareholders, and has also unanimously recommended that shareholders accept the offer and tender their common shares.
The Mark’s Work Wearhouse board has received a fairness opinion from its financial advisors, CIBC World Markets, stating that the consideration to be received pursuant to the offer is fair from a financial point of view to the shareholders of Mark’s Work Wearhouse. The offer is conditional upon a minimum of 66 2/3rds of the outstanding common shares on a fully-diluted basis being deposited to the bid.
The transaction is subject to regulatory approval, and other customary conditions, and is expected to close in early February, 2002.
Terms of the Support Agreement include the payment of a $6 million termination fee to Canadian Tire if this transaction does not proceed due to certain circumstances.
The transaction is expected to be immediately accretive prior to synergies and to increase Canadian Tire’s earnings and cash flow in 2002. In addition, Canadian Tire anticipates further realization of benefits and cost savings achievable by leveraging the strengths of both organizations.
For example, due to Canadian Tire’s scale and scope of operations, the Corporation anticipates that annualized savings can be captured in the range of $5 to $7 million for items such as transportation, real estate, and advertising costs.
Mark’s Work Wearhouse will be run as a standalone retail division of Canadian Tire, and will be led by Garth Mitchell continuing as president, reporting to Wayne Sales, president and CEO, Canadian Tire. Garth is a seasoned retail executive with more than 30-years of experience and he is currently Chairman of the Retail Council of Canada. He has been President and CEO at Mark’s Work Wearhouse since 1995 and has spent ten years with the organization. Prior to that he held senior positions in department and specialty store chains along with being a founding partner of a women’s specialty chain.
“While Mark’s most recent sales and financial performance have been impacted in seasonal categories due to warmer weather, it has consistently delivered very strong historical financial performance. Our ability to help build their market share through our integrated business structure will play a key role in driving Mark’s performance,” added Sales. “In announcing our Strategic Plan in September we stressed it would not be business as usual at Canadian Tire. We have created a compelling growth vision for the future, and Mark’s Work Wearhouse meets our new business criteria such as earnings accretion and maintaining financial flexibility, while also providing Canadian Tire with an excellent opportunity to accelerate our growth,” said Sales.
“Garth Mitchell and I are looking forward to continuing to build the Mark’s brand and concept as part of the Canadian Tire family,” he added. “Canadian Tire is one of the country’s strongest retailers. The combination of its national position as Canada’s most-shopped retailer, its marketing reach and strategic repositioning capabilities can provide enormous upside to the Mark’s Work Wearhouse concept, accelerating our leadership in the work and work-related casual apparel and footwear categories,” said Garth Mitchell, president and CEO.
“We believe this agreement is not only positive for our customers, shareholders, employees and franchisees, but also that it provides a terrific strategic fit between the businesses. We are excited by the opportunity this presents to maximize profitability and our growth potential,” he added.
Mark’s Work Wearhouse is a specialty retail organization specializing in work and work-related casual apparel. It operates 325 corporate and franchisee stores in Canada which generated total system sales of $488 million and net earnings of $8.2 million, or earnings per share of $0.30, in its fiscal year ended January 27, 2001. Mark’s Work Wearhouse has achieved a compounded annual growth rate in net income of 20.2 per cent from 1997 to 2001. Mark’s Work Wearhouse has recently announced a “super branding” strategy to convert its “Work World” and “Docker’s Stores” divisions under the flagship Mark’s Work Wearhouse banner and brands over the course of the next 18 months to maximize profitability and the strength of its core private label brands. The L’Equipeur brand will be maintained in Quebec. As part of the plan, Mark’s Work Wearhouse will emerge as a national chain with over 300 stores in large and small markets and will be able to respond to growing consumer demand for its strong private label brands across its entire store network.
Additionally, as part of its strategic development, Mark’s Work Wearhouse has opened a highly successful 16,000 square foot prototype store in Calgary showcasing its full and expanded merchandising assortment and customer offering.
There is a strategic fit with Canadian Tire in that Mark’s Work Wearhouse’s national store reach and brand reputation are strong and its core customer demographics are a very close match to Canadian Tire’s, with a loyal base of customers in the 25-59 age range. Both Canadian Tire and Mark’s Work Wearhouse products and services serve the same type of customer, providing items for everyday use, with one organization focused on hard goods and accessories and the other on soft goods and accessories. B
ecause of the similarity in customer segments, Canadian Tire believes potential cross-merchandising opportunities exist between Mark’s Work Wearhouse and Canadian Tire Retail. In addition, Mark’s Work Wearhouse can realize significant cost savings by leveraging Canadian Tire core capabilities and strengths such as real estate, Canadian Tire ‘Money’, financial services, treasury and advertising.
It is also a financially attractive deal. The management team of Mark’s has delivered very strong five-year historical financial performance: system sales up 12.6 per cent; EBITDA up 21.1 per cent; gross profit up 15.5 per cent; and net income up 20.2 per cent (all figures compounded annual growth rates).
As a result, the deal is expected to be accretive to earnings and cash flow in 2002 for Canadian Tire prior to synergies.
“We believe there is potential not only to drive Mark’s growth but also to extend the growth of Canadian Tire Retail’s sales as part of this transaction. Working with Mark’s management team and franchisees, we will consider the introduction of targeted Mark’s Work Wearhouse brands that fit our assortment and customer offering, along with other value creating opportunities such as generating greater circulation of Canadian Tire ‘Money’ and credit cards,” said Mike Medline, executive vice-president, New Business Development, Canadian Tire. “A small, cross-functional team from Canadian Tire and Mark’s Work Wearhouse will be formed to pursue cost-savings and growth opportunities,” added Medline.