Canadian convenience store chain Alimentation Couche-Tard Inc. has seen its shares soar spectacularly since 2010 on the back of a disciplined acquisition strategy and solid operational execution. And no single investor has benefited more from that shoot-out-the-lights performance than Metro Inc.
The Quebec-based grocer has a sizable position in Couche-Tard, a stake that dates all the way back to 1987, when it took shares as payment for selling the company 75 stores under the 7 Jours banner. Now, with gasoline running at four-year lows and consumers expected to spend at least part of the extra savings on impulse and convenience items at service stations, Couche-Tard looks set to climb further. With each passing day, the value of Metro's stake climbs higher with it – making its own stock worth more.
Metro has already sold down its position in Couche-Tard once, monetizing about 48 per cent of its total participation in January, 2013, in a bought deal led by BMO Nesbitt Burns. It used the proceeds to pay down debt and buy back shares.
Among the reasons for slashing its stake, Metro cited the fact the position was getting too big from an exposure point of view. At the time, the market value of its Couche holding was roughly $1-billion, representing 20 per cent of Metro's own market capitalization.
Today, the remaining stake is worth even more – some $1.3-billion. It accounts for about 18 per cent of Metro's market cap and about 9 per cent of its forward price earnings multiple, according to November estimates by Barclays Capital analyst Jim Durran.
Mr. Durran figures Metro's own share price performance (up 36 per cent this year) is partly attributable to the rise in the value of its Couche-Tard stake. Couche-Tard stock has gained about 50 per cent since the start of the year.
Beyond the sheer novelty of the situation, Metro's holding in Couche-Tard is important in that the grocer will use it to fund its own growth or improve its balance sheet.
That it shows no signs of preparing to sell the stake now is a reasonable indicator that it doesn't believe it has any immediate and obvious use for the money. So while rivals like Loblaw and Sobeys bulk up with takeovers of Shoppers Drug Mart Corp. and Safeway Canada, respectively, Metro could stay on the sidelines of industry consolidation a while longer.
"At the time [in 2013], we had very specific use for the proceeds," François Thibault, Metro's chief financial officer, told The Globe and Mail. "Today might be a different environment."
Everybody has an opinion about whether Metro should hold onto the stake or sell it, Mr. Thibault said. He said Metro management is closely tracking the worth of the investment. The 20-per-cent capitalization level that spurred the last stake cut is not a definitive marker that will trigger an automatic sale, Mr. Thibault said. He said the company's capital needs are equally important.
"If there were bigger needs than the normal [capital expenditure] – let's say there was a big acquisition or a large investment, then you would decide: Do we fund it through debt or do we fund it through perhaps monetizing a portion of Couche-Tard?" Mr. Thibault said. "We have no pressing need or urgent need at this stage" to sell the stake.
Metro bought a controlling position in specialty baker Première Moisson this past summer in a bid to boost the quality of its bread and pastries offerings. Speculation about a merger between Metro and pharmacy chain Jean Coutu Group Inc. pops up from time to time, but there is no indication the Coutu family is ready to sell.
Nicolas Van Praet