Imasco

History

Imasco was the former owner of Imperial Tobacco Canada, Canada Trust, Shoppers Drug Mart and the Hardee's restaurant chain. The company sold Hardee's in 1997 to CKE, Canada Trust in 2000 to Toronto-Dominion Bank and Shopper's Drug Mart in 2000 to a consortium of institutional investors. British American Tobacco, or BAT, had owned 41.5% of Imasco's shares. In 2000 British American Tobacco purchased the remaining 58.5% shares in Imasco and amalgamated the company with Imperial Tobacco Canada Limited.

Imasco was unbundled when its shareholders overwhelmingly approved an $11 billion takeover from BAT, which held a controlling interest in Imasco since it had been created in 1970. It created value for its shareholders through spurts of share price appreciation and regular dividend payments. It just didn't add enough shareholder value.

But, it was a mistake that was built to last. It was a consumer products conglomerate that managed to survive by relying on an immense cash flow from a virtual monopoly of the Canadian tobacco industry. Tobacco profits papered over numerous and consistent failures in both Imasco's diversification and operating strategies, wasting enormous amounts of shareholders' money throughout the 29 years of its existence.

When Imasco was formed in 1970, the founding CEO thought there was only 10 good years left in the tobacco business and that the firm's diversification efforts had to make an effective contribution to Imasco's earnings in a short time frame. It was to successive management's immense relief that this expectation proved wrong. Imperial Tobacco's success in introducing low-tar or "light" cigarettes dramatically extended the lifespan of the Canadian tobacco industry and Imasco.

In Imasco's early years, shareholder value went unrealized as a result of a surprising number of ill-conceived attempts to diversify the earnings stream. From the 1970s through to the mid-1980s, shareholders had to endure consecutive futile investment efforts in such unrewarding initiatives as wineries, food processing, sporting goods, soft-drink retail distribution, natural resources, and magazine and cigarette retailing.

However, the true Achilles' heel of the company's diversification efforts was the persistent efforts to make Imasco into a North American (as opposed to Canadian) consumer goods company. The losses for shareholders piled up as Imasco attempted without success to build positions in fast-food (Hardee's Food Systems, Inc.) and drugstore (Peoples Drug) retailing in the United States.

Following the 1986 acquisition of Canada Trust, Imasco said its management style henceforth would be strategic monitoring and operational excellence. Again, shareholders paid a price. For example, Shoppers Drug Mart—the largest drug store chain in Canada—was years behind schedule and millions of dollars over-budget in rolling out a centralized purchasing and distribution system. Effort and lots of money were mis-allocated in the years Imasco executives and directors devoted to trying to right the People's and Hardee's disastrous investments.

As for strategic monitoring, Imasco witnessed the global consolidation of the tobacco industry as well as the break-up of failed conglomerates and resisted acting. In 1989, BAT restructured its only other affiliate company besides Imasco, an Australian conglomerate known as Amatil in which it held a 41% interest. In a mirror of the Imasco strategy, BAT sold the diversified business interests of Amatil and retained the tobacco company from which Amatil had expanded. It is difficult to imagine a stronger signal management could ignore.

If Imasco had been a conglomerate success like Berkshire Hathaway, it would have been difficult for BAT to stop such a value creating train. Imasco's true record of questionable achievements led to the conclusion in Britain and by Imasco's other institutional investors that even greater value could be realized by forcing the conglomerate's disassembly in 1999.