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Mergers & Acquisitions

Why Couche-Tard Is Watching This Grocery-Pharmacy Deal

Metro could pay for acquisition through c-store stock sale

UPDATE, Oct. 12, 2017: Metro Inc. is selling off 32.3 million shares or 85% of its stock in Alimentation Couche-Tard Inc. to finance its acquisition of Jean Coutu Inc., Couche-Tard said on Oct. 12. Couche-Tard is repurchasing approximately 4.4 million shares for $200.6 million U.S. "This transaction is a unique opportunity for Couche-Tard to repurchase shares at an attractive price, which represents a worthwhile business opportunity that benefits our shareholders,” said Alain Bouchard, founder and executive chairman of Couche-Tard.

MONTREAL – In a deal that could have financial repercussions for global convenience-store giant Alimentation Couche-Tard Inc., Canadian grocer Metro and Canadian drug-store chain Jean Coutu have entered into an agreement for Metro to acquire Coutu for approximately $3.6 billion, subject to regulatory and Coutu shareholder approvals.

Metro owns 32.2 million shares in Couche-Tard, valued at approximately $1.52 billion, and it has the option to sell those shares to help finance the transaction. Couche-Tard acquired the 75-unit Sept-Jours Convenience Store division of Metro-Richelieu Inc. in 1987 in exchange for 1 million new shares in Couche-Tard, which then amounted to 17% of the company (it now owns about 6%).

Keith Howlett, an analyst at Desjardins Securities, Montreal, believes that Metro is planning to sell some or all of the shares, according to a report by The Globe & Mail. If it does, he speculates that other investors could follow suit because of the chain’s recent slowing merchandise sales growth of 1.4% in the U.S. market, down from 2.4% growth in the same quarter of the previous year, he said. In Canada, same-store sales on merchandise declined year-over-year, said the report, suggesting sluggish consumer spending.

Some industry observers, however, reason differently whether Metro will sell the stock.

“What will make them hesitate to do that is the fact that in 2013, they sold 10 million shares of Couche-Tard stock just before the stock skyrocketed, which was very bad timing indeed,” Guy Leroux, editor of DepQuebec.com, told CSP Daily News. “Had they waited a year or two, they could have made a billion more.”

On the retail side, Metro’s “upcoming merger with Jean Coutu should not bother Couche-Tard too much, if at all,” Leroux said. “This whole merger idea is really a way out for Jean Coutu, which is tired to deal with the Quebec government’s generic drug-payment reform. [They have lost millions in recurring revenue] and are very unhappy about that. As for Metro, it’s both a counterblow to Loblaw, which bought Shoppers Drug Mart a few years ago, as well as a move to prevent a hostile takeover, since its new combined worth promises to be significantly higher.”

Metro is also trying to diversify its business in an industry under increasing threat from Amazon’s food expansion via Whole Foods, according to a Bloomberg report.

Metro CEO Eric LaFleche said the company will take proceeds from at least part of its holdings when the time is right. “We will be using proceeds from Couche-Tard if and when the market [presents] the right opportunity for us," he told BNN. "We will take our time. We have full financial flexibility, full financing commitments to close the transaction. So, we have time ahead of us. We don’t have to sell all, we can sell some.”

Laval, Quebec-based Couche-Tard declined a CSP Daily News request for comment on what the deal or the sale of the shares could mean for the convenience-store chain.

The combined Metro-Coutu business will have a network of more than 1,300 stores in Canada.

Montreal-based Metro owns 334 Metro and Metro Plus grocery stores in Quebec and Ontario; 209 Marche Ami and 82 Marche Extra small-format grocery stores in Quebec; 128 Food Basics and 97 Super C discount grocery stores in Quebec; and 60 Marche Richelieu and two Les 5 Saisons upscale grocery stores in Quebec. It also has 250 drug stores under the Brunet, Metro Pharmacy and Drug Basics banners.

The company also owns 420 Service, Servi Express and Depanneur Gem convenience stores with gasoline in Quebec.

The Jean Coutu Group Inc., Varennes, Quebec, operates a network of 419 franchised drug stores in Quebec, New Brunswick and Ontario under the PJC Jean Coutu, PJC Clinique, PJC Sante and PJC Sante Beaute banners.

Couche-Tard's network consists of nearly 9,500 c-stores in North America, including more than 7,550 stores under the Circle K, Couche-Tard, Corner Store and other banners.

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