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Leon's to acquire The Brick in C$700 million deal

TORONTO — In an unexpected and surprising development, Leon's Furniture Limited will acquire its archrival, The Brick, in a deal made in response to the rising American presence in the Canadian retail landscape while shoring up their respective positions in a sluggish economy and a weakening housing market.

The transaction, valued at approximately C$700 million, is expected to close sometime in the first quarter of 2013.

In a joint statement, the publicly held furniture, mattress and appliance giants said Leon's will purchase all outstanding common shares and common share warrants of The Brick for C$5.40 per share and C$4.40 per warrant.

That price represents a premium of approximately 62% over the 20-day value weighted average of The Brick's common shares on the Toronto Stock Exchange as of the close of business Friday. The warrants, which have an exercise price of $1 and expire on May 27, 2014, had a closing price on the TSX of C$2.36.

The closing price of the Brick shares on the TSX was C$3.50. Leon's shares were trading at C$11.57.

Leon's and The Brick will continue to operate as separate banners out of their current head offices in Toronto and Edmonton, Alberta, respectively. Terry Leon will remain as CEO of Leon's and will be CEO of the new combined entity.

Vi Konkle, who has served as president and CEO of The Brick since January 1, will continue as president.

Bill Gregson, currently The Brick's executive chairman, has agreed to stay on in an advisory capacity. It is anticipated that Gregson will join the Leon's board of directors.

Mark J. Leon will continue to serve as the chairman of Leon's.

"This transaction brings together two great Canadian companies with complementary geographic footprints to strengthen our position in the home furnishings marketplace. We will apply the best practices of both companies to offer even greater value to our customers and create more opportunity for our associates," Terry Leon said in a statement.

"Our combined team will have access to national buying opportunities in merchandising and marketing, and a national distribution network that will enable us to greatly enhance our online shopping capabilities," he continued.

"We welcome this opportunity to partner with this iconic corporation," Vi Konkle said. "By joining forces, we can strengthen both of our businesses, enhancing everything that has made Leon's and The Brick two of Canada's best-known retailers and preserving The Brick's roots in Edmonton."

The two largest members of Canada's top five furniture, mattress and appliance retailers have seen their sales and earning strained in the recent months as consumers have started to turn away from spending to pay down their debt while, at the same time, the country's housing market has slowed considerably. The Brick has spent the last couple of years getting its financial house in order, recently repaying bondholders almost all of the C$110 million they were owed.

Meanwhile, some large U.S. retailers are turning to Canada in search of opportunities that have eluded them south of the border. Early next year, Target will make its formal entry into Canada, opening the first group of what will eventually be a 130-plus store chain. Not long ago, Big Lots acquired Liquidation World. Both are major players in furniture and home furnishings.

Other U.S. incursions are also expected.

"During these economic times where we have seen multiple American corporations make inroads in our country through acquisitions, it is a pleasure to see two successful Canadian retailers reach such an agreement that will better serve Canadian consumers," Terry Leon said.

The Brick's four major equity holders - including company founder Bill Comrie, Toronto-based Fairfax Financial Holdings Limited, the Chou RRSP Fund and Gregson, who together hold about 66% of the outstanding shares and warrants - have all entered into irrevocable voting support agreements in favor of the deal.

The transaction is subject to court and regulatory approval.

Leon's will fund the acquisition from existing cash resources and a new C$500 million credit facility secured from the Canadian Imperial Bank of Commerce and Desjardins Capital Markets.

Currently, Leon's operates 76 corporate and franchised stores in all Canadian provinces except British Columbia. The Brick operates 230 corporate and franchise stores under four banners including The Brick, United Furniture Warehouse, The Brick Mattress Store and Urban Brick.

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