by Elaine Dewar
Douglas Gibson seemed particularly upset that these groundless fears and gripes were obscuring a remarkable gesture. “I have never seen a gift horse have its teeth more microscopically examined,” Gibson told Maclean’s, sounding as though his own teeth were clenched. “The point is the gift—Avie Bennett has made a generous, imaginative gift that will keep M&S going as a Canadian entity.”91
Usually when an important business changes hands and a press conference is called to announce it, the sale price is the first thing trumpeted. It’s the way business people keep score. Yet nowhere in the contemporaneous press reports of the gift/sale, or even in Roy MacSkimming’s book on the publishing trade published years later, was there information on how much Random House had paid for its 25% of M&S. MacSkimming, writing in 2007, said it was for an “undisclosed sum, rumoured to be large.”92
Which made sense. M&S had published most of the authors whose works constitute the CanLit canon, everyone from Margaret Laurence to Alice Munro, from Michael Ondaatje to Margaret Atwood, Leonard Cohen, Mordecai Richler. It had also published major non-fiction authors such as Peter C. Newman, Pierre Berton, Farley Mowat, writers who had produced books about every Canadian subject imaginable. The M&S backlist will sell for as long as anyone is interested in Canadian stories.
Of course, as Maclean’s also pointed out, Bennett’s gift to the U of T would earn him a significant charitable tax credit, in effect a gift of cash or a reduction of taxes owed, courtesy of Canadian taxpayers. How much? Maclean’s reported that estimates ranged up to $15 million, but no one knew what that number was either.93
The M&S story was pushed aside that July 31st by one which signalled extreme concentration in another area of the Canadian reflection business—newspapers. That day, Hollinger International Inc., the owner of the biggest newspaper chain in the country (and the third biggest in the world), put out a release saying it had reached an agreement to sell its Canadian chain along with several other media properties. This transaction concentrated Canadian media ownership to an unprecedented degree, one that David Olive, writing in the Toronto Star, described as unequalled in any other G-8 country. Some called it a danger to democracy.
Ownership of the Southam daily papers, including the Ottawa Citizen, the Montreal Gazette, major papers in Calgary, Edmonton, Vancouver, and Winnipeg, half of the National Post and a host of regional and municipal papers, was transferred, at the price of $3.2 billion, from two right wingers to a third.94 Conrad Black and David Radler, who controlled Hollinger International Inc. through a holding company called Ravelston, sold these properties to Israel Asper and his family. Asper, a right-wing Liberal and a friend of Prime Minister Jean Chrétien, was the dominant shareholder of Canwest Global Communications, which already owned a Canadian television network and other media properties in Canada and abroad: this deal gave Canwest a huge voice in the Canadian marketplace of ideas just months before a federal election would be called.95 Canwest soon insisted that all its newly acquired papers had to follow the editorial line emanating from its head office in Winnipeg. That editorial line was pro-Liberal, pro-Chrétien. Two years later, Canwest fired Russell Mills, long-time publisher of the Ottawa Citizen, for running an editorial calling on Prime Minister Chrétien to resign over the Shawinigan affair.96
And finally, just one day after the November 27, 2000 federal election returned the Liberals to power, the bookselling side of the cultural reflection industry imploded. Chapters became the object of an all-cash takeover bid from the owners of Indigo, the much smaller chain of booksellers. Publicly traded Chapters (234 stores) received an unsolicited offer for 43% of its shares from the main shareholder of Indigo (14 stores), a private company called Trilogy Retail Enterprises L.P.97 Trilogy had already purchased 9.5% of Chapters’ shares on the open market, so if Chapters’ shareholders took up this offer, Trilogy would own 53% of Chapters and be able to merge it with Indigo.98
Trilogy was and is controlled by Gerald (Gerry) Schwartz, husband of Heather Reisman, the founder and chief executive officer of Indigo. Both had been leading Liberal fundraisers99 and would be again. Nigel Wright, by then a lawyer with degrees from U of T and Harvard, and still an active Progressive Conservative operator, had also become a managing director for Schwartz’s publicly traded equity investment company, Onex, and acted as an officer of Trilogy.100
Starting Indigo in 1994 had represented a distinct shift in Heather Reisman’s career. A niece of Free Trade Agreement negotiator Simon Reisman, she’d grown up in Montreal and spent a short time at McGill before marrying and starting a family. After her marriage broke up, she worked with her brother to grow his IT company, and then became a business consultant.101 Gerry Schwartz was introduced to Reisman by her boss when Schwartz came to Montreal on business. They fell in love. According to the arbitrageur Andy Sarlos in his autobiography, Fireworks, when Gerald Pencer, a Montreal businessman who had been one of Reisman’s clients, bought the small financial services company Financial Trustco in Toronto, in 1981, Reisman became a director and Schwartz became one of Pencer’s investors. When Schwartz created Onex, Pencer became one of Onex’s lead investors. But after growing very fast on a diet of Drexel Burnham Lambert junk bonds, by 1988 Financial Trustco was in trouble. And things got worse that fall when reporter Philip Matthias revealed in the Financial Post that Pencer had once been a tad too close to the Montreal mob. A decade earlier, Pencer had given in camera testimony to the Cliche Commission about his friendship with William Obront.102 Obront had been a money launderer for mobsters Vic Controni and Paolo Violi before his arrest in 1983 for selling massive amounts of Quaaludes in the US.103
Ed Clark (a former federal civil servant involved in devising the National Energy Programme and later, the CEO of TD Bank and advisor to the Ontario government) had just been brought into Financial Trustco as chairman. He proceeded to sell the company before it could be bankrupted. Pencer retreated to a family business, a practically moribund soft drink company called Cott Corporation. In 1990, Reisman became President of Cott Corporation. Thanks to deals made with President’s Choice and Walmart, Cott soon became a major stock play. According to Sarlos, the share price zoomed up quickly from $4 to $60. Reisman stayed at Cott until 1992, but there was a small problem concerning her failure to declare, in a timely way, that she had sold some Cott shares. An offer to serve on a major business board failed to materialize, apparently due to her relationship with Pencer.104 She resigned from the company just as Pencer brought in the former lead marketer for President’s Choice, Dave Nichols.
It was two years later that Reisman decided to get into the book business. She heard that Borders, a US-owned big box bookseller, was interested in expanding to Canada.105 She formed Indigo and, in 1996, asked the federal government to let Indigo partner with Borders. The government refused—the Investment Canada Act requires Canadian booksellers to be Canadian controlled.106 This refusal was surprising given the social, political, and economic clout Reisman and her husband had by then accrued. Both were politically active Liberals, raising money, and in Reisman’s case, offering policy advice to Ontario Premier David Peterson. Schwartz had taken on the job of bagman-in-chief for the federal Liberal Party when it was led by John Turner, raising millions to retire its debt. They later raised a lot of money for Paul Martin when he ran for the Liberal leadership.107 Perhaps that is why the proposed Borders partnership found no favour in Ottawa. By 1996, Chrétien was watching warily as Martin, his Finance Minister, maneuvered to replace him.
Schwartz seemed to be an even less likely bookseller than Reisman. Book selling is a low-margin business. Schwartz had spent his adult life pursuing high margins. He grew up in Winnipeg, went to law school and articled there with Israel Asper, then a renowned tax lawyer. Later Schwartz went to Harvard Business School to get an MBA. While studying at Harvard, Schwartz met Bernie Cornfeld who gave a speech at the school’s Speakers’ Bureau, which Schwartz ran. (Apparently Schwartz also ran a number of
small prairie businesses on the side.) Cornfeld was the founder of Investors Overseas Services, then the world’s largest group of mutual funds, a money tsunami that would soon collapse. Schwartz spent one summer working for Cornfeld out of the IOS mansion in Geneva where, according to Peter C. Newman in Titans (to whom I am indebted for this material), very attractive women were made available to moguls who stopped by in search of a deal. According to Newman, Schwartz found this sort of behaviour repellent, but learned a lot from watching Cornfeld deal with major business people.108
After receiving his MBA, Schwartz went to work in the investment business in New York at Bear, Stearns Inc. There he had a desk beside Henry Kravis, who later became a founding partner of the legendary leveraged buy-out firm Kohlberg, Kravis, Roberts (KKR). Schwartz wasn’t happy with the money he was making in New York, so he returned to Winnipeg in the late 1970s, and rejoined Asper. Together, they created Canwest Capital Corp., which grew very quickly by making smart acquisitions. By 1981, Schwartz and Reisman had moved to Toronto. Schwartz began developing, along with other Canwest investors, the precursor to Onex.109 But in 1983, Schwartz and Asper parted ways over the sale by Canwest of an insurance company, Monarch. Schwartz turned his full attention to raising money to create Onex, then a leveraged buy-out vehicle.110
Onex now owns and manages about $22 billion in equity investments around the world.111 On its website it boasts a 28 percent internal rate of return. Schwartz is by far its largest shareholder, and owns all its multiple voting shares as well as 17.6% of the subordinated voting shares. This arrangement allows him to retain control of Onex no matter what.112 He is both the President of the Corporation and its CEO as well as its board Chairman. Onex buys control of, reorganizes, and then holds or resells companies. Some are publicly traded, some are privately held. Onex also runs investment funds with partners. These funds buy shares of companies active in favoured lines of business such as real estate and casinos. Onex earns management fees and interest from these funds. Onex likes to say it has hundreds of thousands of employees worldwide, a number that governments certainly pay attention to, but it’s less a direct employer and more like an octopus. Its managers control the boards which control the management of the companies it buys into. Onex employs a tight-knit group of managers based in Toronto, New York, and London.
The Onex way of doing business is premised on the notion that aligned interests lead to better outcomes. Its managing directors, directors, and associates (mainly men but lately several women) must invest their own money in the companies Onex invests in and which they oversee, as well as in Onex itself, so that their personal interests are aligned with their investors’ and employer’s interests.113 They have to keep reinvesting fees earned until they have acquired at least one million Onex shares, which they must hold until retirement. Schwartz has said on the record that in searching for opportunity, he avoids risk and seeks control. He takes home a remarkable amount of money—in 2014 he was the highest paid CEO in Canada, earning $87.9 million through various forms of compensation.114
The board of Onex comprises very accomplished and powerful persons, including Peter Godsoe, former Chairman and CEO of the Bank of Nova Scotia, Robert Prichard, former President of University of Toronto, and Heather Reisman. Robert Prichard has served on the board of Onex since 1994, the same year Reisman founded Indigo.115
Trilogy Retail Enterprises LP., Indigo’s majority shareholder, is located in the same Bay Street building and on the same floor as Onex.116 Schwartz owns a lot more shares of Trilogy, and therefore Indigo, than Reisman does,117 which suggests that Indigo has value beyond any dividends earned from selling books, toys, and pillows.
In November, 2000, when Indigo made its offer for Chapters, its CEO, Larry Stevenson, did not want Chapters to be taken over by Trilogy/Indigo or anyone else. He had very quickly built Chapters by acquiring other bookstore chains and had just set up his distribution warehouse/wholesale operation, Pegasus.118 He fought back by appealing to the Ontario Securities Commission, alleging he needed more information about Trilogy/Indigo’s financial situation, though they were offering cash. However, by early 2001, after failing to get the Ontario Securities Commission to stop the Trilogy offer, his strategy changed.119 The two parties agreed to merge.
This merger would plunge the book-selling end of the English Canadian book business into the economic condition known as monopsony, a wonderful word that my word processor doesn’t recognize but is well known to economists. It would eventually leave English Canada with only one big English language bookstore chain, a chain that also owned its own wholesaler/distributor and that had been demanding large discounts from publishers, dumping large numbers of books back into publishers’ laps, and failing to pay for months on end.
The merger was therefore investigated by the Competition Bureau. After investigating, the Competition Commissioner took his concerns about it before the Competition Tribunal whose ruling is on the public record (except for the secret part that is still withheld).120 Legal analysts of Canada’s competition policies would later point out that the Bureau’s investigation of this proposed merger is one of the very few instances in which the problem of monopsony has been addressed by Canadian competition authorities.121
Monopsony refers to the economic circumstance in which there is only one buyer in a market. That buyer can abuse its position because it controls the destinies of all its suppliers, in this instance, Canadian trade book publishers. Such a buyer can dictate to its suppliers the terms of trade, can demand outrageous discounts, and can hold back payments in order to squeeze better terms. Traditionally, the Competition Bureau has not been concerned with the abuse of suppliers, so it was interesting that monopsony became an issue. The Competition Tribunal that heard the case was led by Mr. Justice Marc Nadon, appointed to the Federal Court by Prime Minister Mulroney, and appointed to the Tribunal in 1998. (He was later appointed to the Supreme Court of Canada by Stephen Harper, only to have the Supreme Court rule that he did not have the specific qualifications required for Quebec appointees.122) The Tribunal ordered that several conditions would have to be met in order for the merger to proceed. Chapters and Indigo had to divest certain stores; refrain from building any new superstores for two years; and institute certain practices—a behaviour Code—for dealing with publishers, all under the eye of a Monitor. Terms of trade, including the size of discounts, returns permitted, etc., were included in the order and were to be in force for the next five years.
Reisman quickly invited respected persons onto the merged entities’ new board. They included movie maker Robert Lantos, of Serendipity Point Films, formerly of Alliance-Atlantis (which Schwartz had invested in in 1994123), and Senator Michael Kirby, a very well connected Liberal. Nigel Wright, an officer of Trilogy, also became an Indigo director.124
Another instance of monopsony that drew the attention of the Competition Bureau a few years later also concerned Wright and Onex. It was the proposed purchase of Famous Players by Cineplex- Galaxy. At the time of the merger offer, in July, 2005, Onex controlled Galaxy, which had in turn bought the remains of Cineplex out of bankruptcy. Paul Martin, whose leadership of the Liberal Party had been supported by Schwartz and Reisman to the tune of $315,000,125 was by then the Prime Minister of a minority Liberal government. Martin’s family had an indirect interest in the transaction. Nellmart, a family investment company that dated back to Martin’s father’s time in government, owned some movie theatre properties in Vancouver leased by Famous Players. The management of Nellmart was in the hands of Martin’s sons.126 The Competition Bureau’s analysis showed that in some markets the purchase by Galaxy-Cineplex of Famous Players would result in the combined Cineplex-Galaxy-Famous Players entity owning 100% of the local movie theatres.127 The purchase was permitted anyway though divestitures were required. Perhaps not oddly at all, Nigel Wright, still serving Trilogy and on the Indigo board, also managed Onex’s interests in the movie screen side of the cultur
al reflection business.
Wright stayed on the Indigo board until April Fool’s Day, 2006.128 By then, Stephen Harper had become the Prime Minister of a minority Conservative government and the Indigo Code of Conduct was no longer in force.
By early 2001, five years after Amazon sold its first book online,129 Chapters was under Indigo’s control. But its newly achieved monopsony turned out to be a mixed blessing. Chapters had invested about $50 million in its wholesaler Pegasus, but it was an unmitigated disaster. In addition, foreign-owned Walmart, Costco and Toys“R”Us, had gobbled up almost 17% of the bookselling market.130
As Heather Reisman would tell the Standing Committee on Canadian Heritage in March, 2001, as the Chapters-Indigo merger proceeded she found herself holding the keys to a rotten empire. Pegasus, she told the Committee, was broken. “I can tell you, I have been in there for a month. I am very familiar with logistics…This facility is plain, ordinary broken. It does not work.”131 She had no idea how she was going to get unsold inventory out of there, whether publishers would accept books squirrelled away in unmarked boxes for more than a year as returns, or whether she’d have to dispose of them some other way.
Indigo staggered as it struggled to put two very different companies together and to deal with publishers according to the Code. It staggered again as technological innovation, the success of online selling through Amazon, the spread of the Internet, the great increase in speed of downloading, the rise of social media, the creation of ebooks, disrupted all media including the selling of paper books. Indigo continued to lose market share to non-traditional booksellers like Walmart and Costco, neither of which are affected by the provisions of the Investment Canada Act because selling books is not their main business.