In­vestors step up as Metro steps out of Couche-Tard

The Globe and Mail (Alberta Edition) - - REPORT ON BUSINESS - ANDREW WILLIS NICOLAS VAN PRAET

In­vestors sig­nalled a rosy out­look for Ali­men­ta­tion Couche-Tard

Inc. by snap­ping up shares in the con­ve­nience store chain that

Metro Inc. sold to help fund its foray into the phar­macy busi­ness.

Metro raised $1.55-bil­lion by sell­ing the ma­jor­ity of the Couche-Tard shares it ac­quired in 1987 for $75-mil­lion, in re­turn for a chain of con­ve­nience stores.

Metro’s stake in Couche-Tard ranks among the all-time great in­vest­ments, as the Mon­tre­al­based gro­cer pre­vi­ously dipped into this piggy bank in 2013 by sell­ing $479-mil­lion of CoucheTard stock.

At the time, Metro man­age­ment made it clear that they viewed Couche-Tard as a non­core hold­ing, to be cashed in when needed. The $4.5-bil­lion ac­qui­si­tion of drug-store chain

Jean Coutu Group Inc. an­nounced ear­lier this month gave Metro a rea­son to sell more Couche-Tard shares.

Metro sold its stake in three lots, rais­ing $650-mil­lion by sell­ing Couche-Tard shares to a syn­di­cate of in­vest­ment banks led by Na­tional Bank Fi­nan­cial Inc. and BMO Nes­bitt Burns Inc., which in turn sold the stock to in­vestors. The of­fer­ing proved en­tic­ing, with de­mand equal to five times the avail­able sup­ply, ac­cord­ing to in­vest­ment bank­ing sources. Metro sold stock for $57.17 a share, and Couche-Tard stock jumped Thurs­day on news of the deal, clos­ing at $61.24, up 3.9 per cent.

Metro also sold $650-mil­lion of Couche-Tard shares to the Caisse de dépôt et place­ment du Québec, and raised $250-mil­lion by sell­ing shares back to CoucheTard, which the com­pany will can­cel. Metro con­tin­ues to hold 5.1 mil­lion Couche Tard shares, worth an ad­di­tional $300-mil­lion.

Metro cashed in the bulk of its Couche-Tard stake at a time when the com­pany’s fu­ture own­er­ship is in doubt.

The com­pany’s four founders, in­clud­ing chair­man Alain Bouchard, con­trol Couche-Tard through a dual share struc­ture that is sched­uled to ex­pire in 2021. Two years ago, the founders at­tempted to ex­tend the ex­pi­ra­tion date, but were re­buffed by in­sti­tu­tional in­vestors, and in re­sponse, Mr. Bouchard raised the pos­si­bil­ity of sell­ing the chain.

How­ever, in­vest­ment bank­ing sources say Mr. Bouchard is likely to reach an agree­ment with in­vestors on gover­nance at Couche-Tard well ahead of the 2021 dead­line, and added that Metro’s exit was en­tirely linked to the Jean Coutu trans­ac­tion.

» Metro’s share sale comes as Couche-Tard weighs an­other op­por­tu­nity to bulk up in North Amer­ica, where tar­gets of size are be­com­ing rarer as con­sol­i­da­tion con­tin­ues.

U.S. gro­cer Kroger Co. said Wed­nes­day it is ex­plor­ing strate­gic al­ter­na­tives for its cor­ner stores, in­clud­ing a sale. The com­pany’s 787 stores across 18 states sold 1.2 bil­lion gal­lons of fuel last year and have gen­er­ated 62 straight quar­ters of same store sales growth, mak­ing it an at­trac­tive tar­get if the price is right, ac­cord­ing to RBC Do­min­ion Se­cu­ri­ties an­a­lyst Irene Nat­tel.

“As with any op­por­tu­nity of size, we would ex­pect CoucheTard to give care­ful con­sid­er­a­tion to the po­ten­tial op­por­tu­nity to ac­quire Kroger’s c-store as­sets,” Ms. Nat­tel said in a note. Premium mul­ti­ples are be­ing paid at the moment for con­ve­nience store as­sets but the price CoucheTard will be will­ing to pay will re­flect the po­ten­tial syn­er­gies it can wring from a deal through things such as cost re­duc­tion.

Metro’s takeover of Jean Coutu cre­ates a Que­bec re­tail cham­pion in gro­cery and phar­macy. But a deal, if fi­nal­ized, would also leave a com­bined com­pany that is vul­ner­a­ble to the forces of con­sol­i­da­tion in re­tail. Metro has no nat­u­ral takeover de­fences, along the lines of the dual class shares that ex­ists at Jean Coutu and Couche-Tard, and is sig­nif­i­cantly smaller than the largest North Amer­i­can re­tail­ers.

Metro’s po­ten­tial vul­ner­a­bil­ity has been high­lighted by Montreal’s In­sti­tute for gover­nance of pri­vate and pub­lic or­ga­ni­za­tions, and if a takeover did ma­te­ri­al­ize, it would be­come a ma­jor po­lit­i­cal is­sue in Que­bec.

As with any op­por­tu­nity of size, we would ex­pect Couche-Tard to give care­ful con­sid­er­a­tion to the po­ten­tial op­por­tu­nity to ac­quire Kroger’s c-store as­sets. Irene Nat­tel RBC Do­min­ion Se­cu­ri­ties an­a­lyst

Ali­men­ta­tion Couche-Tard (ATD.B) Close: $61.24, up $2.30 Metro (MRU) Close: $41.87, down 12¢

COLE BURSTON/BLOOMBERG

Metro raised $1.55-bil­lion to help fund its foray into the phar­macy busi­ness by sell­ing the ma­jor­ity of its Couche-Tard shares.

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