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Forzani CEO Bob Sartor (Todd Korol)
Forzani CEO Bob Sartor (Todd Korol)

Forzani makes bland Canadian Tire cool Add to ...

Eighteen- to 35-year olds dominate consumer behaviour and pop culture. It may be hard for anyone outside this age range to admit, but the statistics speak for themselves.

That fact has been a problem for Canadian Tire because until now, the firm has had little traction with this demographic sector. The merger with Forzani changes everything.

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Canadian Tire readily concedes that it best serves the young and the old. "A customer that eludes us is the younger demographic that shops the country's malls and urban centres," chief executive officer Stephen Wetmore said on a conference call Monday

At the moment, parents may buy their kids' first bikes at Canadian Tire, but as the children age, they want something that's a bit cooler, or in style. They want the best gear and the more expensive bikes, and Canadian Tire doesn't offer that. But Forzani does.

In other words, the Forzani acquisition will allow Canadian Tire to touch all points of the customer life cycle. At the moment, the company brings in young kids for sports equipment, along with their parents and other adults who need hard goods for their homes and gardens, but misses the important 18- to 35-year-old market.

Canadian Tire execs also praise the deal as a complementary merger. Mr. Wetmore noted that when a Forzani chain opens near a Canadian Tire store, sales at that Canadian Tire store drop by only 1 per cent. That's because 70 per cent of Forzani's sales come from apparel and footwear, not hard goods.

The $771-million acquisition is being financed with $500-million in cash and the rest in short-term financing. The purphase price estimates Forzani's enterprise value at 7.3 times its earnings before interest, taxes, depreciation and ammortization over the last year. Combined, Forzani will contribute between 8 and 14 per cent of the merged company's revenues, EBITDA and cash flow.

On the conference call, Canadian Tire said it approached Forzani, which raises the question of why now? "A lot's changed in the last two or three years to get us to this point," Mr. Wetmore said. In early 2009, the company's balance sheet wasn't in good shape, and once it recovered, managment had to organize things behind the scenes, getting things like the supply chain just right.

With everything now settled, the company had time to look for targets. With Forzani, they found a partner that also dominates the hockey equipment market. (Both Canadian Tire and Forzani are the No. 1 and 2 sellers in Canada.) That, naturally, caused analyst Keith Howlett at Desjardins Securities to ask Mr. Wetmore who he thought was the better hockey player: Sidney Crosby or Jonathan Toews? (Crosby has an endorsement deal with Sport Chek; Toews has one with Canadian Tire.)

The question brought some laughter. "I'm not commenting on that one," Mr. Wetmore replied, chuckling.

BMO Nesbitt Burns advised Canadian Tire on the financial terms while Goodmans LLP and Stikeman Elliott LLP advised on legal matters.

Greenhill & Co. Canada advised Forzani on financial matters and Blake, Cassels & Graydon LLP provided legal advice.

Follow on Twitter: @timkiladze

 
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