Fp500: Booms, busts and aggro

Booms, Busts and Aggro

Dana Lacey, Financial Post Magazine June 05, 2007

Here’s one thing you can be sure of: None of the companies on the FP500 sit still for long. They rise or fall each year based on changes in markets and the success or failure of their own various strategies. Those shifts and changes can put a troubled firm on the rebound or send another one into a new line of business or a whole new market. They can even lead to change at the top. Here, we present the stories of 10 companies – firms like WestJet and Quebecor – at just such turning points. You’ll find lots more when you dig into our full FP500 ranking.

Turnarounds

[183] WestJet Airlines Ltd.

The new year must have come as a relief for WestJet Airlines Ltd. CEO Clive Beddoe. After a lengthy battle against slumping sales and a corporate espionage scandal, he could at last tell shareholders that the hard times were over for a while. Announcing 2006 results for the Calgary-based discount carrier, he happily reported a $114.7-million profit, compared to $24 million the year before.

Beddoe’s now talking big about his airline’s future, promising to raise its share of the Canadian market to almost half from 34% by 2010. To get there, he has already announced several initiatives, including plans for winter flights to the Caribbean and increasing the size of the fleet. In March, WestJet also became the preferred Canadian airline for Wal-Mart Stores Inc.

But analysts remain wary. They note that WestJet faces stiff competition in the discount sector from Air Canada’s Tango fare class. They also warn that Beddoe and Co. may have difficulty defending their carrier’s low-cost reputation as WestJet becomes bigger and more complex. In other words, fasten your seat belts.

[25] Jean Coutu Group Inc.

Jean Coutu, founder and CEO of pharmacy chain Jean Coutu Group Inc., learned a valuable lesson last year: If you want something done right, fire your son and do it yourself. Coutu, 79, came out of retirement in late 2005 to put his company back on track. The problem? A two-year misadventure in the U.S., led by his son, then CEO Franois Coutu, who now runs the firm’s Canadian operations. In the months that followed, The elder Coutu negotiated a $3-billion deal to sell his firm’s U.S. holdings to Rite Aid Inc. The deal essentially erased the company’s debt of $2.5 billion and left it with a 32% share of Rite Aid. The good news didn’t stop there. When Jean Coutu announced its third quarter results for fiscal 2007 in April, net earnings topped US$184 million, up from just US$31.6 million the year before. If the move in the U.S. is to be remembered as a disaster, Coutu now says, “I’d like a few more disasters like it.”

[476] TimberWest Forest Corp.

With energy prices high, a U.S. housing market that’s slowing and warmer weather that has kept the mountain pine beetle breeding and feeding on forests in the B.C. interior and Alberta, it’s no wonder that most Canadian forestry firms lost money in 2006. But that wasn’t the case for coastal forester TimberWest Forest Corp. The Vancouver-based income trust was one of very few at the top of the industry that actually grew revenue in 2006, posting a 4% increase to $478.1 million. How? For starters, the pine-beetle plague is a potential breadwinner for TimberWest: When interior foresters suffer, coastal operators like TimberWest are called upon to cover unmet demand. But more importantly, TimberWest is also B.C.’s largest landowner, with 334,000 hectares of property across the province, including lakefront and riverfront land on Vancouver Island – where market prices increased 16% over the course of 2006.

With assets like these, TimberWest is moving into the real estate business, selling off land it feels would have lower value if kept for logging. In one recent move, for example, TimberWest donated 40 acres of land to build a hospital, which may generate interest among developers for surrounding land the company also owns.

So far, TimberWest’s real estate move has had positive results. It generated $32.9 million in distributable income for the trust last year, up 146% from 2005. Less clear, however, is how long the strategy will last. Real estate is a finite asset, and TimberWest has said it has no plans at this time to become a developer itself. For now, however, the trust’s unit holders are no doubt happy to know they still have cheques in the mail.

[37] Quebecor Inc.

In March, Quebecor Inc. released its results for 2006, featuring a net loss of $93.9 million on revenue that had also shrunk 3.8% to $9.8 billion.

It wasn’t that everything was bad for the Montreal-based multimedia firm. Its cable arm, Vidotron Ltd., for example, reported strong annual customer growth. Things were different, however, at Quebecor’s troubled printing division, which suffered an 8.1% decline in operating income.

Three weeks later, CEO Pierre Karl Pladeau announ-ced his intention to make Quebecor Canada’s fourth wireless service provider. In a strongly worded public speech, Pladeau lambasted Canada’s incumbent providers – Rogers Communications Inc., Bell Canada and Telus Corp. – and accused them of operating as an oligopoly, with no plans to offer innovation or competitive prices to consumers. Pladeau offered plenty of sound bites. But there was another way to read his comments. Wireless is a fast-growing and profitable $9-billion business in Canada – and Quebecor, a cable and media company looking for growth, wants in.

Pladeau’s bluster comes in the lead-up to a federal auction for wireless spectrum in January 2008. He wants Ottawa to make room for new competitors such as Quebecor, fearing that the incumbents will block the company’s entry by outbidding it for wireless frequencies. The incumbents, meanwhile, are fighting to keep the business. But Pladeau’s not alone in his campaign. He’s also drafted Manitoba-based MTS Allstream and Mipps Inc., a small Toronto-based service provider, to join his lobby effort. January’s spectrum auction could be one heck of a fight.

[429] Trinidad Energy Services Income Trust Inc.

With a 45% tumble in natural gas prices during 2006 that depressed activity in Canada, you couldn’t blame drilling firms for look ing farther afield for new businesses.

For Trinidad Energy Services, that has meant making moves into the U.S., thereby drumming up new clients, through acquisitions such as its $64-million deal for Mastco Derrick Services Ltd.

With this and other deals, Trinidad almost doubled the size of its U.S. business in 2006, with excellent results. Profits swelled 160% to $124 million in 2006, while revenue doubled to more than $550 million. But while Trinidad’s move into the U.S. has been rewarding, it doesn’t offer long-term guarantees. Natural gas production there peaked in the 1970s, and the U.S. Department of Energy predicts that North America will become dependent on gas imports from Russia or the Middle East within a decade.

[336] Trican Well Service Ltd.

With questions hanging over the future of the U.S. market, Calgary-based Trican has been building business in Kazakhstan and Russia, through its subsidiary Newco Well Service LLC. Russia and Kazakhstan are home to one-third of the world’s gas reserves, and Newco’s operations have been growing quickly. Revenue in 2006 topped $192 million, a 125% increase over the year before, which helped offset the impact on Trican of softening demand for services in Canada. This year, Newco won a three-year contract that’s expected to generate US$250 million.

Despite rapid growth in Russia and Kazakhstan, Trican hasn’t lost faith in its core North American market. Last year, it invested $140 million in expanding operations in western Canada. It also made an acquisition in the United States, spending US$256 million to buy 93% of Texas-based Liberty Pressure Pumping LP.

[2 (on top 100 subsidiaries list)] Loblaw Cos. Ltd.

In some ways, you could compare Loblaw Cos. Ltd. to the Titanic: Both are huge, rich and, for now, under water. But at least Canada’s largest grocer can see its iceberg. It’s Wal-Mart, which plans to expand its fresh produce offerings at Supercentre stores in Canada.

Loblaw’s weak response to threat of competition from Wal-Mart is a major source of its current woes. It prompted, for example, ex-president John Lederer’s failed move into general merchandise. That, along with other missteps, led Loblaw to a $219-million loss for 2006, its first in almost two decades.

But the company now has a new leader in 34-year-old Galen Weston Jr., scion of the Weston family, which controls Loblaw. With the title of executive chairman, Weston shares management duties with new president Mark Foote and deputy chairman Allan Leighton. And the trio has been making big moves. They’ve closed 43 stores, fired executives and launched a program to reduce administrative staff by 20%. They’re also dumping $75 million into restructuring Loblaw’s beleaguered distribution system. Still, it’ll take time for this ship to turn around. Loblaw sales in the first quarter of 2007 were up 3.3%, to $6.3 billion, but operating income and earnings per share were down.

[296] Laurentian Bank of Canada

When Rjean Robitaille stepped into the CEO’s suite at Montreal-based Laurentian Bank in December, he took over an institution facing broad challenges. The smallest of Canada’s major banks – operating mainly in Quebec, but with branches scattered across the country – it was the only one that saw its share price drop in 2006. It also hadn’t raised its dividends in five years. Change, however, can come quickly sometimes. When Robitaille released his company’s results for the first quarter of 2007 in February, he was able to announce that Laurentian’s fortunes were starting to turn. Profit climbed more than 20% year over year, to $20.6 million, while revenue grew 6%, to $141.6 million.

But Robitaille’s bank is still lagging. To bridge the performance gap, he’s focusing on core strengths, notably small- and medium-sized business loans and growing services it offers to independent financial planners. Analysts warn that Robitaille still faces difficulties: Laurentian holds only 6% of the Quebec market compared to 70% shared by National Bank of Canada and Caisses Desjardins. But Robitaille says that may change if

Ottawa eventually approves bank mergers: Some banks would likely have to sell various assets, and Laurentian will be ready to snap them up.

[83] Rona Inc.

For Rona Inc. CEO Robert Dutton, the good times stopped in May. That’s when he announced that profit in the first quarter of 2007 had fallen 45%. It was a big hit for the fast-growing home-improvement and hardware retailer, which now has more than 650 corporate and franchise stores across Canada.

Dutton attributed the blow to a variety of factors, including bad weather that slowed sales of building supplies in the big spring season and costs related to new store openings and acquisitions. But he also said those factors aren’t changing Rona’s goal of reaching $7 billion in sales by the end of this year. That won’t be easy. The Canadian housing boom that’s been a growth driver for Rona is slowing. U.S. hardware giant Lowe’s Cos. is also lumbering into Canada’s $35-billion hardware and reno market this year, with plans for 10 stores.

But analysts say that Rona still holds an ace: With a variety of small and large store formats, it’s positioned to become a consolidator in a segment where 60% of stores are either independent or members of small chains. Indeed, Rona is already an active acquirer, but what the future holds is anyone’s guess, including Dutton’s. He’s already trimmed part of Rona’s plan for 2007, reducing new store openings to 11 from 15.

[26] Nortel Neworks Corp.

Nortel executives are calling it a “burn your boats” strategy. In January, the troubled telecom equipment maker completed the sale of its third-generation wireless (3G) businesses for US$320 million to Alcatel-Lucent SA. With the sale, Nortel has conceded defeat in that sector – but the company hasn’t given up the ghost quite yet. In a high-risk bid for the future, Nortel is committing to the development of 4G technology, which promises a broad array of new multimedia functions and transmission speeds hundreds of times faster than 3G. With the new plan, Nortel executives are hoping to leapfrog the competition on state-of-the-art technology. Analysts, however, worry that Nortel’s exit from the 3G market will make it difficult to acquire customers when the market for 4w finally does come around. Instead of becoming a player, Nortel may be positioning itself as a takeover target.

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