* Reitmans, Le Chateau, Jacob, Tristan possible targets
* Dollarama viewed attractive to private equity
By S. John Tilak and Pav Jordan
TORONTO, March 27 Well-known Canadian clothiers
Le Chateau CTUa.TO, Jacob and Reitmans (RET.TO) could become
takeover targets as a wave of U.S. retailers follows Target
Corp's (TGT.N) lead and seeks opportunities north of the
There are plenty of reasons why Canadian retailers have
become so appealing: the country's robust retail market, a
healthy economy, proximity to the huge U.S. market, a common
language and lower valuations of Canadian companies.
But why does a U.S. retailer need to acquire a Canadian
chain to set up shop? The scarcity of real estate in big
Canadian cities makes takeovers of companies with ready-made
store locations the surest route for foreign entrants.
That was the rationale of Target in January when the No. 2
U.S. retailer announced a C$1.83 billion ($1.87 billion) deal
to take over Canadian leases on up to 220 Zellers stores owned
by Hudson's Bay Co, North America's oldest company.
The move signaled growing interest by U.S. companies in the
Canadian market, where No.1 Wal-Mart Stores Inc (WMT.N) has had
a large presence for nearly two decades.
"Competitors always react to another's movement and this
was a pretty significant move on Target's part," said Ken
Tuchman, vice-chairman of investment and corporate banking at
BMO Capital Markets.
"Other U.S. retailers may begin thinking, 'Are we just
going to cede the country to Target, or are we going to explore
similar opportunities?'" Tuchman said.
"You're seeing more and more interest in Canadian retail
Tuchman declined to speculate on which Canadian companies
may be for sale.
FROM TARGET TO TARGETS
Sources contacted by Reuters said potential targets might
also include clothier Tristan and sporting goods chain Forzani
Clothier Le Chateau explored strategic options a few years
ago and Jacob is a women's fashion chain that filed for
bankruptcy protection last year.
"There's got to be consolidation there (in apparel) as
large chains are taking market share," said Ed Strapagiel,
executive vice-president at retail consultancy KubasPrimedia.
"So you have to look around and say, what are some of the
smaller fashion stores going to do about it?"
When Wal-Mart entered the Canadian market in 1994, it did
so through the acquisition of about 120 Woolco stores from
Woolworth Canada. Best Buy Co Inc (BBY.N) acquired Future Shop
So it's no surprise that Minneapolis-based Target, known
for its cheap but chic merchandise and with more than 1,700
stores in 49 U.S. states, chose to mirror that strategy.
"Once you get a couple of deals going, everybody gets
interested and looks and says, what is there to buy?" CIBC
analyst Perry Caicco said.
"The gates have opened" for U.S. retailers to enter the
country, he said.
Among the large U.S. retailers without a presence in Canada
are J.C. Penney (JCP.N), Kohls (KSS.N), Walgreen WAG.N and
"If you want to enter Canada with any kind of scope, scale,
if you want to have a critical mass, you will probably have to
make a strategic acquisition," Edward Jones analyst John
"Good quality real estate in Canada is hard to come by," he
said. "The Canadian market has a lot less square footage per
capita compared to the United States."
BUY OR BUILD
Probably the name most often mentioned as a possible target
among Canadian retailers is Dollarama (DOL.TO), the discount
dollar store that went public in Toronto in 2009 and is valued
for its growth prospects. It is also part of a sector that is
already undergoing consolidation.
Last year, Dollar Tree Inc (DLTR.O) bought Canada's Dollar
Giant Store Ltd, including leasehold rights.
"For anybody to come into Canada and play the dollar store,
Dollarama is the target," said Versant analyst Neil Linsdell.
"Obviously you have to pay up for it, but there's no one else
that gets you that scope in Canada."
Linsdell said it would be more likely for a private equity
firm to buy Dollarama than a strategic buyer like Dollar
General (DG.N) or Family Dollar FDO.N.
Private equity firm Bain Capital owned a majority stake in
Dollarama at the time of the IPO but has since trimmed it.
Analysts say bigger Canadian firms like Shoppers Drug Mart
SC.TO and Hudson's Bay Co could also be attractive to large
U.S. firms seeking Canadian takeout targets, although there is
little clarity about who the buyers might be.
Acquisitions have not been the only mode of expansion,
though. Those that wish to take the slower, longer route can
afford to try to develop their own sites, often with a partner.
Firms that have chosen to grow gradually include Gap Inc
(GPS.N), Hennes & Mauritz (HMb.ST), and Zara, owned by Spanish
clothing giant Inditex (ITX.MC).
While there is debate about who might be taken out, one
company that most agree is not on that list is Lululemon
Athletica Inc LLL.TO. Canada's hottest clothing retailer,
which has seen its stock price more than double in the past
year, is probably too expensive. [ID:nN21302563]
(Reporting by S. John Tilak and Pav Jordan in Toronto, Mark
Potter in London, Jessica Wohl in Chicago; editing by Frank
McGurty and Rob Wilson)