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The Globe and Mail

Brick deal a pre-emptive strike for cautious Leon’s

A Brick store in Mississauga.

Tim Fraser/The Globe and Mail

Faced with escalating foreign competition and a wobbling economy, Terry Leon decided it was time to go on the offensive.

In August, the chief executive officer of Toronto-based Leon's Furniture Ltd. approached a major investor in rival Brick Ltd. of Edmonton to talk about a potential takeover. In what would become Project Midnight (for midnight madness sales), Mr. Leon launched an aggressive effort to shore up his company and prepare for a tighter retail market, including the arrival of yet another U.S. discount giant, Target Corp., in 2013.

"There are a lot of Americans taking the plunge," Mr. Leon said on Monday after unveiling details of his family-controlled company's $700-million bid for Brick. "Americans are making the investment ...

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"It's nice to see two Canadian companies do what needs to be done to take on those risks and those opportunities for the future. Sometimes we as Canadians are a little reticent to take the risks necessary to expand our businesses so we can compete, not only with the Americans but anybody in the world."

A combination of calculated risks, a low-key business style and hard slogging has helped the Leon's family over 103 years operate a company known for its "Don't pay a cent event" ads and a bullet-proof balance sheet – even while other family dynasties, most notably the Eatons, have stumbled.

Now Leon's is taking what may be its riskiest step, betting that acquiring a business that is bigger than it is – but with fewer profits – will help it stand up to even bigger foreign players. Analysts say Leon's frugal management gave it the capacity to make the bid.

"They were managing their business very conservatively," said Martin Landry, an analyst at GMP Securities.

"You can see it in their owning their real estate. You can see it with their large cash position, with no debt. It looks like they decided to take a big leap," GMP's Martin Landry said.

With its conservative management, the Leon family was quietly looking for an acquisition over the past few years, Mr. Leon said in an interview. He already had discussed a takeover with Brick and other rivals. The price of a deal with Brick wasn't acceptable in the past. The Brick chain wasn't in as strong a shape as it is today, he said.

By this summer, Leon's decided that Brick had emerged from a massive restructuring in a better position. In August, Mr. Leon went to the office of Prem Watsa, CEO of Fairfax Financial, which had helped rescue Brick, to talk about a potential acquisition.

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But Leon's hunt for a takeover, in times when its sales were slipping amid cautious, debt-burdened consumers, underlines its willingness to take risks even while building cash reserves.

"We take a long-range view of business," said Mr. Leon, a third generation leader in the business. "We always put the business first ... We've always erred on the side of reinvesting more in the business than we take out."

While the Leons family – 14 members work in the operations today, including six of the fourth generation – is taking the plunge in agreeing to buy Brick at a 62-per-cent premium of its recent past trading, it also can be frugal in its daily business dealings.

"They believe in their partners and vendors making a profit – but not so much," said Rick Padulo, CEO of marketing agency Padulo Integrated Inc., who worked for Leon's for almost a decade.

That frugality extends to the family, too. Mr. Padulo remembers when the late Tom Leon, a former chairman, took a few rolls of toilet paper home from head office. Another family member, who acted as chief financial officer, wrote Mr. Leon a bill.

Yet the Leons have taken contrarian steps, such as agreeing to Mr. Padulo's industry-shaking "Don't pay a cent" marketing campaign, which turned the furniture sector on its ear about three decades ago. Deep discounting and layaway plans were common when Leon's introduced deferred payments. The retailer had the financial wherewithal to carry it off, he said. "Sales went through the roof." Similar promotions were picked up by retailers ranging from car dealers to department stores.

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At Leon's meetings, there could be five or more Leon family members in the room, Mr. Padulo recalled. "They all had their area of expertise and they all worked really, really hard ... And they never got full of themselves."

"There's this discipline that's been passed down generation to generation," said Fairfax spokesman Paul Rivett. "They haven't been pulled by the allure of diversifying, they're fully focused just on this business."

Mr. Leon said Leon's will look to further acquisitions in the future and even possible international expansion. And a key focus will be expanding its e-commerce presence at both Leon's and Brick, with the savings from the acquisition.

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