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Jean Coutu saddles up the U.S. Trojan horse

Two smart Canadian chief executive officers have just made the same multibillion-dollar bet on how to best crack the U.S. market.

Jean Coutu, the 79-year-old founder of the eponymous Quebec drugstore chain, yesterday made the best of a bad situation by punting his American outlets to Rite Aid, the No. 4 player in the industry. In getting stock that amounts to a 32-per-cent stake in Rite Aid and $1.45-billion (U.S.) in cash, Mr. Coutu is taking a page from Toronto-Dominion Bank CEO Ed Clark.

Recall that last year, Mr. Clark sold the No. 4 player in discount brokerage, a sector dominated by its highest-volume players, to market leader Ameritrade. In return, TD Bank became the largest single shareholder in the new company, with a 37.5-per-cent stake. It's the Trojan horse approach to U.S. expansion -- invade by hiding inside a larger vehicle.

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Both TD Bank and Jean Coutu have now planted seeds that may, over time, yield a far better crop than anything the companies could have cultivated on their own. Stand-still agreements will keep both companies minority players in the U.S. companies for the foreseeable future. But the drugstore and the bank have a legitimate shot at owning stakes in American market leaders.

That's not a claim Jean Coutu could make 24 hours ago. The chain's well-documented problems in the U.S. market included low-margin stores that were miles behind market leaders CVS and Walgreens when it came to attracting customers. Double capital spending to $300-million to spruce up over 1,800 American outlets, as Jean Coutu intended to do this year, and the chain would still be running a low-margin network against better-positioned rivals.

Rather than lose more ground, Mr. Coutu was able to deal with Rite Aid from a position of relative strength. The heft that comes from owning Eckerd stores gives Rite Aid new clout with suppliers, landlords and clients.

When the accountants do the sums on Jean Coutu's U.S. expansion, highlighted by the $2.5-billion acquisition of the Eckerd's chain two years ago, they will record a $140-million loss. That sum pales against the cost of staying in this game.

Jean Coutu's only financial adviser on this deal was J.P. Morgan, which has quietly risen to the top ranks of Canadian merger and acquisition specialists, in part because of its strong cross-border capabilities. (Merrill Lynch helped with the Eckerd purchase back in 2004.) Across the table, Citigroup and Rothschild worked with Rite Aid.

EnCana shake-up in the pipe

What's the next big deal in the pipe? How about details of EnCana's restructuring.

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The country's biggest oil company has consistently said it will have a partner to help expand its huge oil sands project by the end of September. Conventional wisdom in the oil patch is that EnCana will not only meet that pledge, but use the occasion as a stage for recently named CEO Randy Eresman to state his broader vision for the company.

The strategic issue facing Mr. Eresman is whether shareholders are best served by the company's current structure, which features a focus on both natural gas and heavy oil. The alternative is some sort of a spin-out of the oil sands holdings that creates a pure natural gas play. Adding a delicious tension to this discussion is the fact that an EnCana takeover could become more feasible if the company is restructured.

Traders hit the greens

Based on what's expected to play out at Mont-Tremblant, Que., this weekend, it's safe to say the computer geeks have not taken complete control of trading desks. Yet.

The Canadian Security Traders Association is holding it annual meeting within a 9-iron of Quebec's best courses this weekend, and organizers have done their best to balance the growing role of technology on the Street with the needs of old-fashioned human beings. So there's a heavy emphasis on new trends such as algorithmic trading and the latest developments on electronic stock exchanges, sessions that never would have got in the way of tee times just five years ago.

But traders will also get tips on how to get the most out of their professional lives from a career counsellor, along with a keynote speech from Senator Romèo Dallaire.

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This year's gathering also marks the end of an era. For several years, including the harrowing post-Sept. 11, 2001, period, the entire North American trading community was led by James Duncan, a Canaccord Adams trader who was head of the Securities Traders Association. His term, marked by an emphasis on education and incredible industry change, has expired and Mr. Duncan stepped down to the applause of colleagues.

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