Company Of Adventures - Merchant Prince Part 28

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took over a major real-estate company (despite his selfconfessed ignorance of the subject) and began to a.s.semble and build his om n shopping centres and shake up the I IB(,s oil investm~nts in a huge gamble that almost paid off, In the decade and a half of his dominance he expanded Company sales tenfold from $502 million to S4,829 million, and even if the impact of his stewards.h.i.+p was m.u.f.fled by the recession of the 1980s, he altered the I IBC ,s corporate culture forever.

But the bill was staggering. McGiverin, fully supported by the board, which was loaded with financial experts, leveraged the Company to the hilt so that its once modest "blister on the balance sheet" became a fes- tering boil. Under McGiverin, the 1113Cs debt grew exponentially from $70 million to $2.5 billion while the number ofissued shares nearly doubled.

The pain resulting from the huge debt became intense when prime interest rates peaked at 22 X percent in September 1981.* McGiverin's pi iority a.s.signment was to create a major retailing presence in Toronto, the countrys largest marketplace. One problem was that he alone among his planning staff had ever lived there, and everyone except for his comptroller (Donald Wood, who was from Niontreal), was a Witimpegger, totally unaware of the Ontario city's retailing geography. "We wanted to be at Yonge and Bloor because we would then be sitting on the crossroads of the subway system," Wood recalled, "but market research was of little help because they gave us a

*In early 1973, three Canadian brokerage houses, Richardson Securities, Harris & Partners and Wood Gundy Lin-t.i.ted managed a syndicate that floated $100 million in convertible HBC debentures. 'rhe proceeds were delivered to McGiverin in the form of a huge cheque embossed on the back of a stretched beaver pelt, certified by the Canadian Imperial Bank of Commerce (see ill.u.s.tration on page 470).

470 MERCHANT PRINCES.

When underwritersfor a new $1 00-million debenturejor The Bay made payment on July 21, 19 73, they appropriate4y chose a beaver pelt on which to write the huge cheque. Left to right: Irwin Nightingale, a.s.sistant T-easurer, HBC; Lionel Goffart, Blake, Ca.s.sels & Graydon; Donald Fraser, Richardson Securities; lain Ronald, Treasurer, HBC; Peter Wood, Vice-President, Finance, HBC: Howard Bennett, Richardson Securities; Jim Pitblado, Harris & Partners, Donald McGiverin, President, HBC; Pat Vernon, McCarthy &McCarthy, _7ohn O'Brian, Harris & Partners.

potential sales range of $15 million to $30 million. We opted for a $60-million, 260,000-square-foot flags.h.i.+p department store and made the final decision in the recreation room of Don McGiverin's house on a Sunday morning in the fall of 1971, with most of us not quite sure where Bloor and Yonge actually was." That dramatic choice meant that McGiverin himself had to

*The final decision on Bloor and Yonge made by the HBC board on November 19, 1971, was not unanimous. Rolph Huband, Company Secretary, recalls that "in my thirty years of attending Board and Canadian Committee meetings, almost all decisions have been by consensus with no opposition, but a vote was taken on both Bloor and Yonge and on the Freiman purchase, with three directors voting against in each case."

MCGIVERIN'S RUN 471.

move to be near his ma.s.sive investment, and that in turn meant the end of Winnipeg as the Company's operational head office.

Completion of the giant Toronto unit was celebrated to the rocking cadence of the Grease Ball Boogie Band on August 1, 1974. At the official opening a week later, so many customers Jammed in to inspect the first downtown department store opened in the Ontario capital in forty-four years that after two hours the doors had to be shut and escalators closed down.*

McGlverin subsequently expanded the Company's national activities by purchasing the 30,000 credit-card accounts of Montreal's bankrupt department store Dupuis Fr6res, creating an 11BC travel agency, establis.h.i.+ng a sixty-three-outlet catalogue-store operation under the Shop-Rite banner, and acquiring 35 percent of Eaton's life insurance and mutual ftind marketing agency, renamed Eaton Bay Financial Services Limited. But the most interesting non-retail diversification was the deal in 1973 with Siebens Oil & Gas.

Through a subsidiary, the Company still held mineral rights on 4.5 million prairie acres; but depletion allowances had run out, and McGiverin decided on a potentially more profitable-though much more riskyinvestment. It involved turning the HBCs rights income over to Slebens, a company then active in North Sea exploration, in return for 3.2 million Siebens shares (35 percent of the total), mainly to come from its treasury. A brainchild of Don Mackenzie, a savvy Calgary oil

*The HBC honoured the launch by promising to donate three black beavers to the Metropolitan 16ronto Zoo. But the Company's trappers had done such a thorough job that none of the subspecies could be found in Canadas backwoods. Three ammals were finally located at a breeding ranch near Salt Lake City, Utah. They were purchased for $2 00 and s.h.i.+pped north.

472 MERCHANT PRINCES.

consultant,~Nho had joined the FIBC board a year earlier, the deal caught investors' imaginations because it gave The Bay, which had money but few proven oil reserves, the chance to share in a big potential strike, and it gave Siehens, which had potential oilfields but little money more cash for exploration.

Not long afterwards, McGiverin purchased control of Markborough Properties, which owned a real-estate portfolio worth at least $100 nil Ilion. In a dramatic lastminute struggle with Robert Campeau, McGiverin outbid the developer from Sudbury mainly because hysterical Markborough shareholders wanted anybody but Campeau to buy their company. They kept The Bay in the bidding and stormed Royal Trust offices five minutes before closing to get back the stock they had already pledged to the swashbuckling financier.

Ironically, McGiverin, whose hiring as a first-rate retailer had been a condition of the U.K. directors for transferring the Company to Canada, was soon spending most of his time on corporate affairs, acquisitions and strategy, while Ronald Sheen, an uninspired executive who had been bypa.s.sed for McGiverin in 1969, ran The Bay department stores t hrough most of the 1970s. By the spring of 1978, McGiverin had gathered around him a top-flight takeover team of financial experts including Peter Wood, John McIntyre, lain Ronald, Donald Wood, Rolph Huband, Peter n.o.bbs and Douglas Mahaffy, while Marvin Tiller, aided by George Whitman, provided locomotion for the Northern Stores Div]sion. McGiverin himself, usually jacketless, feet up on his desk and incessantly puffing on Camel cigarettes, had grown into the job, running the Company with good humour but little charisma.

Dependent more on logic than emotion, he conducted the business not so much by issuing orders as by making suggestions-and repeating them if they weren't followed up. Irish in manner rather MCGIVERIN'S RUN 473.

than Scottish- outgoing and breezy, not introspective and gloomy-he liked to pretend that he was really a small-town boy, hitching his pants up towards his armpits, telling stories with a grin on his lived-in face and rhapsodizing about the weekends he spent "getting a little plastered" at his "hut in a swamp" at Palgrave, Ontario. (He actually lived in a luxury apartment in the Manulife Centre in Toronto's upscale Bloor and Bay retailing district, and much preferred spending weekends at the Lyford Cay resort in Na.s.sau, where he had a house.) One of his few eccentricities was that he never sold any of his cars, which he considered old friends. He still had his first purchase, a 1930 Ford coupe, but mostly drove his 1963 Falcon, his 1962 Cadillac convertible or the 1972 Lincoln-bought to celebrate his appointment as the HBCs president. He never got caught up in the Company's history except as a source for after-dinner anecdotes, and stoutly maintained that "you don't make money by reflecting on a glorious past.... There are no inuskrat traps hanging from the rafters any more."

THE YEAR OF THE BIG CHANGE WAS 1978. McGiverin's acquisitive impulses reached their crescendo as, in a series of stunning corporate coups, he more than doubled the Company's revenues-as well as its longterm debt.

There were a few disposals: the sale of a minority interest in Glenlivet Distillers of Scotland to Seagrams for $6 million, realizing $4.4 million in profit; sale of the HBC's 3 5 -percent interest in Siebens Oil & Gas to Dome Petroleum at $38.50 a share, generating a $94-million gain for a five-year hold, though the dream of striking it rich in the North Sea never materialized.

In early June, word came through from George Richardson's Vancouver office that Joe Segal, chairman 474 MERCHANT PRINCES.

of Zellers Limited, which operated cut-rate department stores, wanted to discuss some new merchandising concepts with McGiverin. When the two men met, Segal came right to the point: his great merchandising idea was to buy the Hudson's Bay Company. He proposed purchasing 51 percent of the issued shares at $28, about $7 over current market, though part of the value would be in Zellers shares. An astonished McGaverin replied that any offer would have to be for 100 percent, and ail cash. Shortly afterwards,jim Pitblado, chairman of Dominion Securities, the country's largest brokerage house, phoned McGiverin to inform him that Dominion Securities would be acting for Segal, but only if it was a friendly takeover. Then came the kicker: Segal informed McGiverin that he had consulted his a.s.sociates and that a 100-percent, all-cash offer was on its way. Segal matter-of-factly confirmed that he had the necessary funds ($450 million), and agreed to meet McGiverin in Winmpeg on July 7 to complete the takeover.

The Company of Adventurers went ape. Flying to that meeting (aboard the Company's new HS-125-400 $2-million jet), McGiverin and his advisers hurriedly pored over intelligence reports they had gathered about Segal.

Born in Vegreville, Alberta, he had dropped out of school at fifteen to work in the Credit Arcade clothing store in Edmonton ("a quarter down and a quarter a week"), was a labourer (luring construction of the Alaska Highway, then lost his entire savings in an all-night poker game. After two years in the army, he was demobbed in Vancouver and launched a small army and navy surplus outlet, starting with some naval exhaust fans built to operate through portholes. He sold them off to tailor shops willing to have round exhaust holes cut in their store fronts. Subsequently he opened a clothing outlet called Fields near Woodward's main store. That was the beginning of a highly successful western chain MCGIVERIN'S RUN 475.

that later included a hardware operation (Marshall Wells). Ile eventually used his Fields holdings for a reverse takeover of Zellers, a Canadian variety chain that had been sold in the 1950s to WT. Grant, a U.S. mar- keting giant. At the time, Canada's business Establishmerit thought so little of Segal that the news of his takeover pushed down Zellers' already depressed stock $2.00 to a new low of $2.50. But within two years, Zellers was in fine shape and Segal was wealthy enough to purchase Vancouver's most beautiful house.*

Before he left Toronto for the Winnipeg meeting, McGiverin had tried to find out who was backing Segal and soon traced the Bank of Montreal as the most likely suspect. 'vNhen he got Fred McNeil, the Montreal's chairman, on the telephone, nearly everything McGiverin asked was met with stone-cold silence.

Finally the HBC president demanded, "May I a.s.sume that your bank is behind this takeover bid?"

"If I were in your position," McNeil replied, "that is the a.s.sumption I would make. But I didn't say it."

The Winnipeg meeting began warily. McGiverin and his advisers had concluded that only one move would defuse Segal's takeover strategy: a pre-emptive bI d for Zellers.

"I recognized the Hudsons Bay Company as a sleeping giant with a tremendous, understated balance sheet," Segal later recalled. "The Company would have been the

Rio Vista, his palace at 2170 Southwest Marine Drive (sold to a Singapore billionaire in 1990), had its own terraced Italian garden, waterfall, tranquillity ponds and galleried conservatorv where he grew grapefruit-sized lemons and melon-sized grapefruit. The mansion itself had ten fireplaces, eleven bathrooms, a sunken ballroom, a full-sized tavern with suede walls, not to mention a banquet-sized dining chamber, a billiards room decorated in tartan, a fidl-scale spa and so on-all done up in a mongrel mixture of elegance and Disneyland.

476 MERCHANT PRINCES.

joe Segal, princ.i.p.al HBC sbarebolderfor a time

greatest leveraged buyout in history. Its breakup value was huge, except that I wouldn't have broken it up but would have maximized the value of its a.s.sets-and that meant merging it with Zellers to create the largest retailing ent.i.ty in Canada. I didn't particularly care which of the two companies emerged on top, as long as it was done."

About halfway through Segal's presentation, his financial man, John Levy, mused-as if he'd )ust then thought of it-"Of course the real way to do it is for The Bay to take over Zellers."

McGiverin was delighted the suggestion-which was to have been his trump card-had been made. Three months later, on October 3, 1978, The Bay bought 57.1 MCGIVERIN'S RUN 477.

percent of Zellers for the equivalent of $1, 0 a share, with Segal receiving 452,177 HBC shares and a lump of cash for his 13 -percent holding in the chain. For his $76-million purchase price, McGiverin obtained control of the 155-store Zellers and the 61-unit Fields chain. The transaction temporarily made the Vegreville entrepreneur the HBCs largest shareholder; becoming the first Jewish Governor of the Hudson's Bay Company was within his grasp.

But in two months, Zellers and Segal were overshadowed by the largest deal in the HBCs history.

SIMPSONS AND THE HBC had always been one another's favourite buyout targets.

They each specialized in quality merchandise, considered themselves the country's best department stores, but unlike Eaton's had no national customer const.i.tuencies. To combine the western dominance ofThe Bay with the eastern presence of Simpsons seemed a perfect match. Back in the 1920s, Sir Augustus Nanton of the HBCs Canadian Committee had approached Sir Joseph Flavelle on the possibility of a merger, but the Simpsons chairman declined on the grounds that he was reluctant at his age to launch new ventures. In October 1936, Philip Chester and George Allan, then running the Canadian operation, were hastily summoned to London by Governor Patrick Ashley Cooper. When they arrived, Cooper informed them he was about to complete negotiations for a merger with Simpsons and that the Toronto department store's chairman, Charles Burton, and its investment adviser (also a major shareholder), Harry Gundy, were on the way to London with the doc.u.ments, ready to be signed. At a meeting the following morning, also attended by HBC director Sir Edward Peac.o.c.k, Chester made a fervent plea against any such move. "I talked for about forty 478 MERCHANT PRINCES.

minutes," he recalled, "about Simpsons, the HBC Stores, the ruinous effect of the deal upon the future of HBC in Canada, and so forth.... As we filed out, Peac.o.c.k called me aside and, putting his arm around my shoulder, said 'Don't you worry,' and left. A few days later Burton and Gundyarrived and proceeded to Hudson's Bay House to see Cooper. By accident or design, they were left in a small anteroom cooling their heels for well over an hour, saiN Cooper for a few minutes, and left in a state of fury and consternation."*

The next attempt, in 1968, was much more sophisticated, involving G.

Allan Burton, who had that year succeeded his brother Edgar as chairman of Simpsons, and Lord Amory, the HBC's last British Governor. d.i.c.k Murray had brought the two men together, and Amory felt quite excited by the prospect, since the combined chains would account for 22 percent of Canadian department-store sales. "There might be something really big for our old Company here," he wrote to Murray. "Anyway, if we do not like it, we can sing in Elizabethan stvle, 'With a hey nay ninny nonny-no!"'

Simpsons then had a market value of $280 million compared to The Bay's $320 million. In the minds of the HBC executives, there was no question whether this should be a merger; it was to be a takeover, pure and simple. Two main problems had to be overcome. The first was corporate.

In 1953, Simpsons had signed an agreement with Sears, Roebuck & Company of Chicago

*The following notation appears in Chester's unpublished his- tory of the Company: "Some years later Charlie Burton wrote the story of his business life [A Sense of Urgency, published by Clarke, Irwin in 1952]. He told me it contained a chapter on these events with HBC and I urged him with all the power at my command to cut this out.... When the book was published I was thankful to see he had done so."

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to form a new enterprise, Simpsons-Sears Limited, which took over Simpsons' mall-order operation and launched an intensive drive to open branches in suburban malls. Among the many conditions of the partners.h.i.+p (which included a provision that Simpsons-Sears could not operate stores within twenty-five miles of a Simpsons outlet) was a firm undertaking that no Simpsons shares could be transferred without Sears' permission. When Burton visited Chicago, Sears executives granted him a hunting licence to follow up the possibilities but also made it clear they would retain veto power over the results.

The other problem was personal. Allan Burton, DSO, CNI, ED, LLD, OSJ, KCIJ, had a proud pedigree, overdeveloped social graces and a keen sense of his own importance. His love of horses (he was joint Master of the Eglinton Hunt for twentv-three years) led him to a commission with the Governor General's Horse Guards.* He fought with the regiment in the Second World War (winning a Distinguished Service Order on the Italian front) and later took over command.t Burton transferred his sense of military precision to Simpsons, trying, not always successfully, to operate his main store like divisional headquarters and its branches like outlying regiments-and he was not about to give up command easily. He ran Simpsons as a family concern, even

*The Burtons were pivotal members of the Canadian Establishment. Their youngsters played department store together with the Eaton boys in their Forest Hill recreation rooms, running a pretend shop named the Seaton Company.

t"The war toughened me up a great deal," he maintained. "For one thing, I overcarne my quite Doticeable stutter. That was from talking on a field wireless sixteen, seventeen hours a day. When I first starte d in action, I used to have to write out every single message before I tried to transmit it."

480 MERCHANT PRINCES.

though the b.u.t.tons and all the directors and senior officers together owned a mere 1.8 percent of the sh-ares.

Burton saw The Bay offer as a way of both increasing his companys retail reach and making the combination so powerful it could never be overshadowed by Sears. The two sides decided to meet in secret on neutral ground at the Waldorf-Astoria Hotel in New York on January 15, 1969.

Their venue was a large dining-room decorated like the Hall of Mirrors at Versailles, with a long green baize table down the middle and delegations seated on either side, as if they were negotiating a peace treaty. Burton had written out several "military appreciations" of the situation, and concluded that the new retailing giant emerging out of the deal should include all of the HB(:s operations and be owned 40 percent each by Simpsons and the f IBC, with Sears tacked on for the remaining 20 percent. The Bay executives wanted to include only their stores, combining them with those of Simpsons and Simpsons-Sears into a package-owned 40 percent by The Bay, 40 percent by Simpsons-Sears and 20 percent by the Canadian public-all operating under the Hudson's Bay Company banner. Those deep differences guaranteed failure, and when it came, Burton blamed the impa.s.se on the HBCs unwillingness to include its oil and gas holdings in the deal. In fact, the idea had been killed by Sears executives in Chicago who insisted they would not go along with any arrangement that didn't guarantee them 50 percent of voting shares.

A decade later, in 1978, coming off his successful takeover of Zellers, McGiverin examined Simpsons afresh. That had been a banner year for Burton. Simpsons-Sears was celebrating its silver anniversary, and in June he had entertained his twenty-five-year employees with a Sunday picnic at his country home. A month later he was host to an anniversary dinner for Edward Telling, chairman of Sears, Roebuck, the world's largest retailer MCGIVERIN'S RUN 481.

Simp.vons Cbairman Allan Burton

with annual sales of $18 billion. During dessert, Burton brought up the fact that he felt his company was vulnerable to takeovers and that it might be best to move towards an outright amalgamation of Simpsons with S impsons- Sears. Six weeks later Telling agreed, and on August 16 the merger was announced. The new coniparty, with a.s.sets of $3.2 billion, would be Canada's seventh largest, and although Sears, Roebuck would retain a controlling interest, Burton would remain Chairman and Chief Executive Officer well past retirement age. The scheme required only the approval of the Foreign Investment Review Agency, which then had to confirm all major takeovers, before being implemented.

"There was really no alternative for The Bay but to try and buy Simpsons because had that merger been 482 MERCHANT PRINCES.

completed, Canada's retail trade would forever have been dominated by Sears," recalled HBC Governor George Richardson. -The timing was not our own, but it was now or irrevocably never, even if it extended The Bay more than we would prudently have done had the circ.u.mstances not been forced on us." McGiverin and Peter Wood were enthusiastic, but some of the acquisition team, notably lain Ronald and Doug Mahaffy, as well as his top merchant, Evan Church, were opposed, pointing out that most of the earnings increases of Simpsons were attributable to SimpsonsSears, while Simpsons itself had grown weary, topheavy and unprofitable.* Martin Jacomb, a British director, strongly opposed the idea of further borrowing and the overheated expansion, although he supported the proposed takeover.

Richardson phoned Russ Harrison, chairman of the Canadian Imperial Bank of Commerce, and instantly secured a standby credit line of $70 million.t Burton had initiated the merger talks with Sears to protect himself and his family against a takeover. Watching the HBCs rampaging growth, he realized that his store might be the next target. It was. At eight o'clock on the cloudy morning of November 17, the

*Joe Segal, who was opposed to the acquisition of Simpsons and whose position in the HBC would be diluted by the shares issued under the takeover, resigned from the HBC board shortly after the deal's completion.

tAii influential factor was a McLeod Young Weir report by Ray Bettridge claiming that Simpsons shares were severely undervalued, with the stock market a.s.sessing the firm as being worth $241 million ($5.13 a share) while the real value of the Simpsons-Sears stock alone held by Simpsons was $248 million-and that took no account of the department store's impressive facilities and valuable real estate.

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telephone rang at Limestone Hall, the four-hundredacre farm that was the Burtons' main residence, near Milton, Ontario. The Simpsons chairman and his wife, the broadcaster Betty Kennedy, were about to leave for Florida.

"Allan," said McGiverin, "this is Don. We're going to be making an announcement this morning, and I wanted to speak to you first. Our board has authorized The Bav to make an offer for your company. The specific ierms will be rnade available on Monday." Good soldier that he was, Burton pressed his clipped white moustache into the mouthpiece, and calmlv replied, "Thanks for letting me know."

McGiverin had actually been trying to get through to Burton for the past ten hours. He couldn't trust anyone else to place the call and seemed unable to find the number or to dial the right combination of digits when he finally got it. "What do you do?" Burton later complained to a friend.

"A guy calls you up at eight in the morning and says he's going to take you over.... It screwed up the whole day."

Thoughts of Florida forgotten, Burton rushed downtown to confer with what he had already named his "war cabinet," which included lawyer Jim Tory, and [an Sinclair, Tom Bell and several other top company directors. He reached Earle McLaughlin just as the Royal Bank chairman was boarding his Jet for Bermuda and asked him for a $500-million credit line. McLaughlin's reply was brisk and to the point: "Canadian or American?"