Dollarama's CEO has been scouting for international expansion opportunities after cementing the company’s footprint at home with some 1,600 stores.Abhijit Alka Anil/The Globe and Mail
Dollarama Inc. DOL-T has struck a deal to buy Australian retailer The Reject Shop Ltd., gaining a foothold on a third continent as the Canadian discount variety chain builds out a formula that has earned it legions of customers in its home market.
The Montreal-based company is offering A$6.68 per share in cash for Australia’s largest discount retailer in a transaction that values The Reject Shop at A$259-million ($233-million), according to an announcement after markets closed Wednesday.
The offer represents a 108-per-cent premium to The Reject Shop’s 20-day volume-weighted average share price of A$3.21. Shares in the Australian company soared as much as 111 per cent in early trading Thursday on the Sydney Stock Exchange, their biggest ever gain.
“Today’s announcement marks a turning point for Dollarama and its expansion,” Dollarama chief executive officer Neil Rossy told analysts on a call late Wednesday. “This represents a strategic acquisition that will enable us to establish a new and complementary growth platform for the future, one that will contribute to creating value for all stakeholders in the long term.”
Mr. Rossy, whose family founded the retailer in 1992, had been scouting for international expansion opportunities after cementing the company’s footprint at home with some 1,600 stores and plans for more. Dollarama also owns a majority stake in Latin American value retailer Dollarcity, making this its second major push outside Canada.
Melbourne-based The Reject Shop operates a network of more than 390 stores across Australia, with more than 5,000 employees. Offering private-label and national brand products from Crayola to Twinings at prices up to $15, the company tallied sales of A$886-million ($779-million) for the 12-month period ended Dec. 29, 2024.
“We are excited about the opportunities that this transaction presents,” The Reject Shop chief executive officer Clinton Cahn said in a statement. “There is strong cultural alignment” between the two companies, he said.
The Reject Shop has been under pressure for at least four years and has struggled to engineer a turnaround. Its largest shareholder, Kin Group, a private investment firm that owns a 20.8-per-cent stake, is backing the offer.
Dollarama said it plans to work with The Reject Shop’s local management team to execute its strategic vision for the business while offering its merchandising and sourcing expertise and operational know-how. That’s the same game plan that has been used to grow Dollarcity’s business in Latin America.
The deal could generate good incremental value by implementing a strong management team and business model similar to Dollarama’s, said Bank of Montreal analyst Tamy Chen, but that will take several years.
In the meantime, shareholders might be concerned about the fact that Dollarama’s growth has not come from M&A turnarounds, Ms. Chen said. The deal also lacks an immediate financial impact and increases the complexity of Dollarama as a company overall, she said.
“Dollarama’s story is becoming multi-faceted,” the analyst said in a note. “Investors will look to see how management executes across its still-growing Canadian platform, Dollarcity (soon expanding into Mexico), and now The Reject Shop in Australia.”
There’s some strategic logic to the deal because the Australian discount segment is underserved compared with Canada’s, with one store per 52,000 people versus one store per 18,000 people in Canada, said Stifel analyst Martin Landry. The Reject Shop has no direct competitor in Australia, and there are no major pure-play dollar chains similar to Dollarama in the country, he said in a note to clients.
Still, The Reject Shop’s recent performance has been nothing short of uninspiring, and major work lies ahead, Mr. Landry said. It’s unclear if the Australian company has suffered operational missteps or a brand perception problem, but Dollarama will need resources, capital and energy to increase its profitability and bring it back on a growth path, he said.