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Private equity stalking major retailing prey

In coming months, expect to hear a whole lot about Eddie Lampert in Canadian retail circles.

Mr. Lampert is the 42-year-old hedge fund manager who made a billion bucks last year-- the first of the breed to crack that barrier. The big win for his seven-year-old fund, known as ESL Investments, was a massive bet on Kmart, which emerged from bankruptcy protection and bought Sears Roebuck.

Mr. Lampert's score, along with money manager victories on forays into department, grocery and drugstore chains, has the private equity and hedge fund types circling several big Canadian names. The Ontario-based A&P grocery chain is already on the block. It's widely expected that Mr. Lampert, as head of the American parent, will sell Sears Canada once the company spins off its credit card operations.

Then there's Hudson's Bay Co., the problem child of Canadian retailing, where American money manager Jerry Zucker holds just less than 20 per cent of the company, and grows steadily more impatient with a turnaround that never seems to catch.

The private equity and hedge fund crowds, who are getting increasingly intermingled, like retail stores because their steady cash flow and underlying real estate can support debt. The trick in this sector is to buy a chain at, say, six times its earnings before interest, tax, depreciation and amortization, somehow fix the operation, then vend the stores at 10 times EBITDA.

This formula has been applied before in Canada -- adding chief executive officer Glen Murphy to Shoppers Drug Mart proved quite the tonic for Kohlberg Kravis Roberts & Co. and Teachers Private Capital. The question is whether lightning can strike twice.

The sale of A&P's Canadian stores has been slowed down by the U.S. parent in order to give private equity players more time to prepare bids, according to money managers who own the stock. However, it's almost impossible to imagine that any financial contender can squeeze juice out of this deal if they have to top the multiple of 10 times EBITDA that a rival such as the Sobeys chain can pay for A&P.

Sears Canada is the more likely candidate for a private-equity-driven turnaround. In fact, CIBC World Markets retail analyst Perry Caicco predicted in a report last week that the chain would likely be sold to a financial player for about $850-million, once the credit card sale is complete.

As for Hudson's Bay, there seem to be no easy answers. There are rumours that a bold Eddie Lampert-type wannabe might try to buy both Sears Canada and Hudson's Bay, and combine the two to better compete with Wal-Mart. The other view came in a scathing sell report last month that saw Jennings Capital analyst Cynthia Rose-Martel write: "Why has there been no takeover? Because the numbers don't work." Her take on the Bay and Zellers chain is: "There is no hidden value that can be surfaced."

Energy experts in demand

Energy looks to be a hot sector of the Canadian capital markets for the foreseeable future. So it makes sense for ambitious employee-owned boutique Clarus Securities to add to its Calgary research team. Oil and gas analyst Kirk Wilson joined up last month as a vice-president, after a stint at First Associates.

The boom in energy also makes economists who focus on this sector hot commodities. Last week, Bart Melek moved from CIBC World Markets to BMO Nesbitt Burns, where he'll be the senior economist covering oil, natural gas and other commodities.

Westwind bulks up on staff

Westwind Partners added to the team yesterday, by bringing aboard investment banking, trading and research talent.

Dennis Logan joined the corporate finance team from Research Capital, adding 12 years of experience. On the trading desk, fellow Research Capital alumnus Derrick Reimer -- formerly a head trader -- joined up. In research, the new hire is Montreal-based Pierre-Yves Terrisse , who has 10 years' experience in technology and industrial sectors.

Haughton joins Versant

Staying with the boutique dealers, Versant Partners -- formerly known as Dlouhy -- will welcome Maggie Haughton as its head trader in July. Ms. Haughton started her career on the "buy side" of the Street as Guardian Capital first trader, and was most recently with a money manager, UBS Securities.

But she's also worked at several dealers, including First Marathon, HSBC Securities and Harris Partners. Versant is a Montreal- and Toronto-based dealer that focuses on growth stocks, such as tech and biotech plays.

© 2007 The Globe and Mail. All rights reserved.

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