Liquor Stores says strategy is working

Chairman fires fresh salvo in proxy battle

It wasn’t the first and it won’t be the last. Such is the state of play between two warring factions at Alberta-based Liquor Stores NA, the dissidents who want to get control of the board and the company which wants to be left alone to implement its plan announced at the end of 2013.

Thursday it was Liquor Stores’ turn to present its case and outline the weaknesses of the plan advanced by the dissident, the Toronto-based investment firm, PointNorth Inc. that has a 9.7-per-cent stake.

Shareholders could do worse than reading the information presented because Liquor Stores is unique: as the country’s only publicly listed retail liquor company, it faces competition in the markets where it operates. (It has stores in four U.S. states.) As well, shareholders will be able to assess the merits of two different strategies.

In an interview, Jim Dinning, chair at Liquor Stores was asked to explain why shareholders should support management — without mentioning the dissidents.

Dinning, a former Alberta finance minister said “we have a plan that is working in the face of the worst economic recession in the past 50 years in Alberta.”

Against that backdrop, he said, the company has “increased sales, increased gross margin, and increased our adjusted operating profit.” But its share price has lagged: over the five years ended Thursday, total return is negative 15.97 per cent, compared with a 54.69 per cent for the S&P/TSX composite. In April, 2016, dividends were cut by two-thirds to $0.03 a month.

Later, when asked to explain the weakness of PointNorth’s case, Dinning added they “have laid out no accurate or compelling case for change and they’ve certainly not laid out a superior plan including a management team. It’s a flawed plan designed by people who worked for a governmentowned retail monopoly.”

In a four-page analysis released Thursday, the company said PointNorth’s plan — in essence reduce costs, generate balance sheet efficiency and invest in the core Canadian market — if implemented, would not be a boon.

Specifically, the analysis shows a fall in gross margin, a sharp reduction (of about $10 million) in operating profits less finance costs and a $2.65 drop in equity value per share to $8.24.

Dinning also expressed reservations about some of the dissident nominees, claiming they lack experience in a competitive retail liquor environment and are not independent from PointNorth, with two of them slated to receive a “bounty fee” if certain events unfold over the next 18 months.

Next week the firm will meet shareholders to present its case. It does so knowing the dissidents have received the support of holders of about 20 per cent of the shares. To win, the company needs the support of about 65 per cent of the other 80 per cent — a big ask. The dissidents need to convince about 40 per cent of the rest to get over the line.

As with all proxy battles, the views of ISS and/or Glass Lewis, two proxy advisory firms will be important, given that some institutional investors are bound by their recommendations. Retail investors are less bound by such opinions.

A PointNorth spokesperson said “with all the hysteria and personal attacks Dinning is acting like the activist while PointNorth is laying out a plan.”

The spokesperson added that shareholders who have seen their share price and dividend shrink, “want a turnaround, not a campaign of mass distraction.

If the current board won’t do it, our nominees can and will.”

Sounds like it’s game on as both sides spend the next three weeks getting out the vote.