Private equity firm Genuity Capital Markets is taking a majority stake in a Canadian discount chain in a move that underlines investors' growing interest in low-price retailing.
In its first foray into pure merchandising, Genuity is expected to announce today an estimated $120-million investment in Bargain Shop Holdings Inc., an heir to the Woolworth's five-and-dime that has been expanding quickly in small-town Canada and wants to grow aggressively in coming years.
The acquisition comes almost two years after U.S. private equity firm Bain Capital Partners purchased Dollarama, Canada's largest dollar-store chain. Both Bargain Shop and Dollarama have found a niche as low-priced convenient neighbourhood alternatives to the colossal Wal-Mart Canada Corp.
Genuity has been quietly investing in an array of companies, including a small printing firm and a North American mall-based medical spa chain, said Nolan Bederman, principal at the boutique brokerage. But this is the first time the company has entered the retailing sector, per se, and Mr. Bederman expects more discount retail acquisitions will follow.
Investor interest in Bargain Shop was considerable, with eight bidders vying for the discounter, industry sources said. The would-be suitors were all Canadian or U.S. private equity firms.
Discount retailing is an attractive investment because of its wide customer base, said Matthew Kahn, a principal at Gordon Brothers of Boston, one of the previous U.S. investors in Bargain Shop.
And discounters are profiting from better margins from savvier overseas merchandise purchasing, Mr. Kahn said. Production in China and elsewhere has improved vastly, in quality and efficiencies. "There's a lot more opportunity for people to give better value to consumers, because they're able to source better."
Gordon Brothers likes to sell its stake in a company when it is healthy and offers "upside" for a buyer, he said.
George Hartman, a veteran retail analyst, said investors have been keen about Canadian retail plays in recent years, and the discount sector has benefited.
"The interest internationally is high by private equity funds and others," said Mr. Hartman of Teratogen Consulting. "They've discovered Canada and I think they like Canadian retailers . . . . I guess retailing is no longer a dirty word."
Genuity was formed almost two years ago by former CIBC World Markets Inc. executives who had overseen investments in a number of retailers, including Roots Canada Ltd. and Sleep Country Canada.
Bargain Shop's experienced management team, led by CEO Michael Roellinghoff, was a key attraction for Genuity, Mr. Bederman said. It expects the 154-store chain to double its approximately $200-million of annual sales within five years, through acquisitions and finding new sites.
Bargain Shop management and the previous investors will continue to have an interest in the company.
Mr. Roellinghoff built the retailer by buying end-of-line products from Canadian manufacturers at cut-rate prices, giving it the flexibility to make last-minute purchases. More recently, however, he started to source more products from China because of cheap prices.
He has focused on being the local discounter in small towns, something similar to the Family Dollar Stores model in the United States. And he has invested in updated technology to track sales closely.
In 1999, Bargain Shop, then a division of New York-based Woolworth Corp., which had been renamed Venator Group Inc., was acquired by Gordon Brothers and Munroe Capital of Chicago, as well as the management group. A few years ago, Banyan Investors of St. Louis also became a partner.