The board of directors at Liquor Stores N.A. Ltd. is preparing for a showdown with activist investor PointNorth Capital Inc., in what is expected to determine control of North America's largest publicly traded booze retailer.
Edmonton-based Liquor Stores recently published a letter to shareholders warning that PointNorth, a deep-pocketed fund founded by Toronto-based entrepreneur John Bitove, is planning to launch a proxy battle for control of the company. The public campaign comes after seven months of private negotiations with the fund failed to produce an agreement on the leadership and strategy at the 252-store chain.
Liquor Stores board, led by veteran director and former Alberta cabinet minister Jim Dinning, asked shareholders to support its slate of eight directors at the company's annual meeting on June 20. PointNorth declined to comment on its plans, but is expected to make its intentions clear this week.
If the dispute does escalate into a full-blown proxy battle, with Liquor Stores shareholders asked to choose between competing slates of directors, it would mark a reversal in a long-running trend in Canada toward behind-the-scenes resolutions of disputes between activist funds and the companies they target.
PointNorth, a fund backed by pension plan OMERS, has been successful in past campaigns for changes in leadership and improved financial performance. Last year, the fund started a proxy battle that led to restructuring of the board at retirement-home chain Extendicare Inc.
PointNorth revealed it acquired a 10-per-cent stake in Liquor Stores last November and said at the time that it planned to discuss "operational performance and corporate strategy with the board of directors and management."
Liquor Stores stock price was on a five-year slide prior to PointNorth's investment, which explains how the retailer came to be targeted by an activist fund.
The market capitalization is currently $280-million, half the company's value in 2012.
Last year, the company's Canadian same-store sales were down 2 per cent from 2015 to $448.8-million, with much of the blame placed on the economic slowdown in Alberta.
In the first quarter of this year, they slipped 4.6 per cent from a year earlier, although part of this was attributed to calendar factors, including the busy Easter season this year falling in the second quarter. Operating profit before amortization in the first quarter fell to $800,000 from $2.1-million a year earlier, despite cost-containment efforts.
In a regulatory filing last Wednesday, Liquor Stores revealed it offered two seats on its eight member board to PointNorth nominees, "in an effort to avoid a costly and distracting proxy fight," but the fund is pushing for control of the board.
"PointNorth has told us it wants control, but not why change is warranted, or what it would do with that control," said Liquor Stores in the shareholder letter. "Ultimately, PointNorth wants control of your company without offering to pay shareholders a premium."
In a letter that asked shareholders to support the current board, Liquor Stores explained that weakness in the stock price reflected increased competition and the recession in the oil patch. The chain has 200 outlets in Alberta and Alaska, regions where Liquor Stores said spending on booze rises and falls with the fortunes of energy companies. Liquor Stores also has outlets in British Columbia and three U.S. states.
The company laid out its plans for improving financial performance, including renovating stores – 46 outlets have been spruced up over the past four years at a cost of $15-million – increasing online sales and adding to the company's stable of high-margin private-label wine and spirits. Liquor Stores currently owns 200 of the brands on its shelves, including the best-selling Pinot Grigio in Alberta, a wine called "Fiorette."
While PointNorth has not revealed its strategy for Liquor Stores, past experience at companies such as Extendicare shows the fund is an effective agent of change. PointNorth partners have deep experience in building consumer-product companies similar to Liquor Stores, and buying and selling businesses.
Mr. Bitove previously launched and ran successful businesses in fast food, satellite radio and mobile phones, and brought an NBA team to Toronto. PointNorth co-founder Phil Evershed is one of Canada's leading merger and acquisition advisers.
The number of proxy battles has been declining in Canada for the past five years and governance experts say that reflects a trend toward boards reaching settlements with dissident shares, rather than fighting public battles for control. Several high-profile battles, including activist fund Pershing Square Capital Management's campaign for change at Canadian Pacific Railway in 2011, saw dissident shareholders replace established board members with their own nominees prior to a formal shareholder vote.
Law firm Fasken Martineau tracks these showdowns and said in a recent report that there were seven proxy battles in 2016, the lowest level of activity in 10 years, and part of a steady drop from a peak of 23 contests in 2012.
Fasken lawyers said there were an additional 16 publicly disclosed dissident shareholder campaigns last year against Canadian companies, and that the number of proxy contests declined because "the activist achieved some or all of its objectives as part of a settlement."
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