Imasco Limited

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Imasco Limited

600 de Maisonneuve Boulevard West
Montreal, Quebec H3A 3K7
Canada
(514) 982-9111
Fax: (514) 982 9369

Public Company
Incorporated: 1912 as Imperial Tobacco Company of Canada Limited
Employees: 100,000
Sales: C$5.23 billion (US$4.53 billion)
Stock Exchanges: Montreal Toronto Vancouver

Imasco Limited dominates the Canadian cigarette market; its Imperial Tobacco Limited subsidiary had a 60% market share in 1990. It produces Canada’s two most popular brands of cigarettes, Player’s and du Maurier. Imasco, however, has interests in a broad range of other businesses. Subsidiary CT Financial Services Inc., popularly known as Canada Trust, is a leader in retail financial services. Imasco also operates fast-food restaurants, through Hardee’s Food Systems; drugstores, through Shoppers Drug Mart/Pharmaprix; and specialty retailing, through The UCS Group.

The British-American Tobacco Co., Ltd. owned a controlling share in Imperial Tobacco at its founding and as of the early 1990s its successor, BAT Industries, still owned 40% of Imasco. One month after Imperial Tobacco’s establishment in 1908, it subsumed the businesses of two other companies controlled by British-American Tobacco, American Tobacco Co. of Canada Ltd. and the Empire Tobacco Co., Ltd., founded in 1895 and 1898, respectively. American Tobacco of Canada was the largest tobacco manufacturer in Canada. Its holdings included D. Ritchie & Co. and the American Cigarette Co. Empire Tobacco had been 80%-owned by American Tobacco of Canada, and produced plug tobacco from Canadian-grown leaf in its Quebec factory. Imperial also obtained about 80% of cigarette-maker B. Houde Co. and 50% of the National Snuff Company, both of which had been controlled by American Tobacco of Canada. Imperial grew through acquisition as well as by increasing brand recognition. In 1930 Imperial acquired Tuckett Tobacco Co., followed in 1949 by Imperial Tobacco Company Limited, of Newfoundland, and in 1950 by Brown & Williamson Tobacco Corporation (Export) Ltd. By the late 1950s Imperial controlled slightly more than 50% of the Canadian cigarette market. Imperial’s only venture outside the manufacture of tobacco products was its United Cigar Stores, Ltd., a wholly owned subsidiary operating 200 tobacco stores.

The impetus for Imperial’s diversification, begun in 1964 under President John Keith, was the increasing evidence that smoking caused disease, which was expected to affect the industry’s future growth. Health concerns about the habit had increased during the 1950s, but the real end of care-free smoking was the U.S. surgeon general’s 1964 report linking cigarettes with lung cancer. The report sparked an initially sharp decline in cigarette sales, which leveled off after several months. Imperial slated layoffs in anticipation of a drop in smoking, converted some factories to cigar production, and most significantly, acquired nontobacco interests—a foil packaging company and two winemakers—within a year of the report’s publication. By 1967 the diversification plan was stepped up, and two vice presidents left, reportedly because of disagreements over company strategy.

In the late 1960s Imperial introduced an array of new cigarettes—some smaller, others equipped with the new filters. None of these was especially successful, and the company’s market share shrank. In another effort to increase sales, Imperial included a gambling game in its 1969 Casino brand. Sales rose, but only because the game was so easy to crack that buyers won more than US$250,000 before the company took the brand off retail shelves. Among other tactics, Imperial introduced an unsuccessful cellulose-based tobacco substitute in the early 1970s. In a more successful venture, Imperial was the first company to introduce low-tar cigarettes; its four new brands, brought out in 1976, were a hit with the public and helped the company’s market share rebound from 35% in 1980 to 47% in 1981.

Under Paul Paré, who became Imperial’s president and chief executive officer in 1969, expansion accelerated. Paré formed Imasco Limited in 1970 as a holding company for potential diversifications as government sanctions began to curtail the tobacco industry. Canadian regulators in 1972 persuaded the industry to put warnings on cigarette packages and restricted advertising spending.

Imasco was also busy developing its other ventures. By 1976 Imasco had completely disposed of its wine businesses. A ten-year stint in sporting goods retailing began with the purchase of the Collegiate Sports Ltd. chain in 1973 and ended with its sale in 1983. In the late 1960s and early 1970s, Imasco made a concerted effort to establish a presence in the prepared-foods industry. Forming the triangular hub of this enterprise were Piñata Foods, Progresso Quality Foods, and S&W Fine Foods. Although the companies were regional successes when acquired, none had the strength to go national as Imasco intended.

Progresso, for example, when it joined Imasco in 1969, was the top Italian-food producer in the United States. Progresso’s success, however, came substantially from the entrepreneurial spirit of its founder and president, Frank Paormina, who retired a year after the acquisition. Ragù soon overtook Progresso in sales. Similarly disappointing experiences with Piñata and S&W resulted in the sale of all three by 1979.

Imasco’s difficulties were typical of Canadian companies attempting to break into the tough U.S. market. Although it may have preferred to expand in Canada, Imasco’s Canadian activities were curtailed by the Canadian government’s limits on foreign investment, which applied to Imasco since it is substantially owned by BAT. These restrictions were lifted in 1985 when Imasco was granted “deemed Canadian status” by the government.

Imasco began to land better investments in the mid-1970s and early 1980s. The company set criteria for new ventures by the late 1970s: acquisitions had to be consumer-oriented businesses with good management teams and excellent growth potential, and of sufficient size and profitability to immediately increase corporate earnings. Acquisitions also had to be in North America, Canada preferred. Among the industries that fit this profile were fast food, drugstores and financial services.

Expansion into fast food came with Hardee’s restaurants. Wilbur Hardee opened his first drive-in hamburger restaurant in 1960 in Greenville, North Carolina. It eventually grew into a chain. By 1976, however, Hardee’s had gotten into financial trouble while expanding to about 1,000 restaurants. That year Hardee’s sold Imasco a 28% interest in the chain for US$15 million. In 1980 Imasco increased its holding to 44% and placed a member on the Hardee’s board. In 1981, by which time Hardee’s had 1,300 restaurants, Imasco bought out the remaining shareholders for US$85 million. With new financial resources, Hardee’s remodeled, expanded its menu, and increased sales per store 47% from 1977 to 1981. In 1982 Hardee’s purchased and converted 650 Burger Chefs, intensifying Hardee’s already strong presence in the midwestern United States. Expanding via regional strength there and in the South-east, Hardee’s was the third-largest fast-food sandwich restaurant group in the United States in 1990, with 4,022 outlets—1,352 company-operated and 2,670 licensed to other operators. Over the years, Imasco acquired two other restaurant chains, Grisanti’s Italian restaurants and Casa Lupita Mexican restaurants, but these were both disposed of by 1989 in order to concentrate resources on Hardee’s.

Imasco acquired its first Canadian drugstores in 1973. Pharmaprix Stores and others were added in 1974, and Shoppers Drug Mart in 1978. The Shoppers Drug Mart/Pharmaprix group has become Canada’s largest retail drug chain, claiming 30% of the market with 645 stores as of 1990. Encouraged by Canadian success, Imasco moved Shoppers into Florida in the early 1980s. Due to the troubled U.S. economy and glutted Florida market, by 1983 the company had lost $3 million on this operation. Imasco was prepared to try again and in April 1984 bought Peoples Drug Stores, Inc. Peoples, however, did not generate the returns Imasco desired, and was sold to Melville Corporation for US$325 million in 1990.

Imasco’s 1986 C$2 billion takeover of Genstar Corporation brought Canada Trustco Mortgage Company, the country’s trust company, into the Imasco family. The mortgage company and the Canada Trust Company are the principal operating companies of CT Financial Services Inc. CT derives most of its earnings from intermediary services. Its funds are provided mostly by depositors in personal savings accounts, term deposits, or specialized accounts like retirement savings plans. For the most part, the funds are invested in residential mortgages.

Because Imasco made its bid during a lengthy controversy over Canadian laws governing the ownership of trust companies, the deal was of concern to the federal government. These concerns were resolved when Imasco made a series of assurances to the government. Principal among these was Imasco’s agreement that the government could require whole or partial divestment of CT pending a legislative review. Legislation was subsequently introduced that would require Imasco to reduce its voting stake in CT to 65% over a five-year period. The law was expected to be enacted in 1992.

The UCS Group is the progeny of United Cigar Stores. This division operates sundry retail stores in five divisions: Woolco/Woolworth Specialty Stores, Hotel Airport Shops, Den for Men/Au Masculin, and Tax and Duty Free Shops. Because of product mix—confections, reading materials, tobacco, and gifts and souvenirs—these stores face stiff competition from supermarkets, drugstores and other vendors. UCS relies on prime airport and resort location for its advantage, and gains 56% of its sales from tobacco products and accessories. UCS outlets placed in Woolco and Woolworth stores led UCS’s record sales increases during the late 1980s, but the group entered the 1990s with the highest growth prospects in the tax and duty free shops in airports.

Imasco encountered further difficulties in its tobacco business in the late 1980s. In 1988 the Canadian government enacted the Tobacco Products Control Act, which required further health warnings on cigarette packages and severely limited the tobacco industry’s advertising and promotional options. Imperial and other Canadian tobacco makers challenged the constitutionality of the act in court. In 1991 the Quebec Superior Court upheld the companies’ challenge, but the government appealed the case to Canada’s Supreme Court, where it was pending in the early 1990s.

Also in the early 1990s, Imasco made further investments in the restaurant business, as Hardee’s acquired the Roy Rogers chain of 600 restaurants. Plans called for converting the Roy Rogers restaurants, located primarily in the eastern United States, to Hardee’s by 1992.

Despite its difficulties, Imasco’s diversification during the 1970s and 1980s was successful, and was duly noted by the financial community in the early 1990s. BAT, Imasco’s substantial stockholder, deflected a takeover attempt during the early 1990s. Although the bid lapsed, it generated heretofore unseen international investor attention for Imasco. In any case, with its particularly strong positions in the financial and fast-food markets, Imasco headed into the 1990s with potential to expand lucratively under the stewardship of Purdy Crawford, who assumed the presidency in 1986 and the chairmanship in 1987.