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Waiting for Jean Coutu: Investors ambivalent with the status quo

The Globe and Mail

Jean Coutu is committing all its cash to a share buyback and special dividend that could amount to as much as $502-million. (Christinne Muschi For The Globe and Mail)

Jean Coutu Group Inc. had options.

Flush with cash, the Quebec pharmacy chain was under pressure to consolidate in an industry rife with competitive threats.

Instead, Jean Coutu opted for the status quo and decided to simply distribute its cash hoard to shareholders.

It was a “rather curious move,” Perry Caicco, retail analyst at CIBC World Markets, said in a report. “Despite their strong strategic position as a potential acquirer, partner or target in drugstore consolidation, the company chose to use their cash to buy back shares and distribute a dividend.”

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The market digested the news with ambivalence.

Investors were hopeful that management would at least hint at a strategic plan in its second-quarter earnings call on Wednesday.

Having recently sold off its remaining stake in U.S. chain Rite Aid Corp., the company was sitting on $460-million in cash.

Meanwhile, Jean Coutu’s competitive landscape has been altered by mergers, primarily Loblaw Cos. Ltd.’s $12.4-billion takeover of Shoppers Drug Mart Corp., and new entrants like Target Corp., which operates in-store pharmacies.

Analysts speculated the company could be considering going after the Rexall chain, owned by Edmonton-based Katz Group Canada Ltd. Or that Montreal-based Metro Inc. could bid for Jean Coutu. “We have long believed that Metro would be the perfect buyer,” Mr. Caicco said.

Hopes for a blockbuster deal were dashed on Wednesday when the company committed all its cash to a share buyback and special dividend that could amount to as much as $502-million.

“We’ll be patient. I hope our shareholders as well are patient,” CEO François Coutu said on a conference call with analysts. “This does not preclude any acquisitions; it doesn’t affect our capital possibilities.”

Investors saw things differently, promptly pushing shares down by more than 6 per cent, intraday.

Mr. Coutu noted that the company has no debt and plenty of room on the balance sheet to finance a major acquisition should a suitable opportunity arise.

But the new plan is a strong indication that the company won’t dramatically change course any time soon and won’t be a major acquisition contender. “[It] also suggests that an acquirer is not currently knocking on the door,” Mr. Caicco said.

Investor disappointment was softened by the special dividend of 50 cents a share and the buyback program at $18.50 a share. The stock closed Thursday at $18.21, which is still down 4 per cent from before the earnings announcement.

Market losses could also reflect skepticism about the share buyback itself, which is largely aimed at the family’s charity. The Fondation Marcelle et Jean Coutu plans to deposit 21 million shares for repurchase.

“Some shareholders are concerned that the share repurchase was structured to meet the objectives of the Coutu family,” Peter Sklar, an analyst at BMO Nesbitt Burns, said in a note. Investors might feel that “the considerable cash balances that developed as a result of the sale of the Rite Aid shares are not being deployed in a manner that optimizes the public shareholders’ interests,” he said.

All shareholders will have a chance to tender their shares to the company’s buyback offer. But many more investors than expected could choose to tender, given the realization that any forthcoming acquisitions are likely to be limited to small, independent chains. Mr. Caicco estimates that as little as 20 per cent of tendered shares could be taken up by the company. Remaining shareholders could either sell at market price, which could remain below the $18.50 bid. Or they could be stuck with a stock no longer supported by the likelihood of a big acquisition.

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