If Metro Inc. proceeds with its plan to buy Jean Coutu Group PJC Inc. for $4.5-billion, investors are going to be left wondering what to make of a third company, Alimentation Couche-Tard Inc.
The three companies share more than a home base in Quebec and a business model that rests on happy consumers.
Metro, a national grocer, owns a significant ownership stake in Couche-Tard, an international chain of convenience stores. For Metro to buy Jean Coutu, a pharmacy chain, it may relinquish its stake in Couche-Tard – currently valued at about $1.9-billion – raising the question of whether investors should follow Metro's lead out of the convenience-store business. They probably should.
Clearly, Metro sees a good opportunity with Jean Coutu. If the deal goes through (the companies say they are in advanced talks for a takeover that would value Jean Coutu at $24.50 a share), it would follow Loblaw Cos. Ltd.'s 2013 deal for Shoppers Drug Mart Corp. That $12.4-billion blockbuster added pharmaceutical heft to Loblaw's stores and better food selection in Shoppers locations – a combination that has helped drive Loblaw's profit and its share price.
In the case of a Metro-Jean Coutu deal, analysts expect that the savings from eliminating overlap between the two companies could be as high as $100-million. Excluding these synergies, Keith Howlett, an analyst at Desjardins Securities, expects that the deal will lift Metro's profit by as much as 21 per cent.
He maintained a "buy" recommendation on Metro shares but raised his target price to $50 from $48. The shares closed on Thursday at $43, down 1.4 per cent.
But here's where things get interesting: Metro owns 5.7 per cent of Couche-Tard, and these shares could be sold to help finance the deal for Jean Coutu. According to Mr. Howlett, Metro could get about $1.6-billion for the Couche-Tard shares, after tax, which would reduce its need to rack up more debt. The analyst believes that Metro is planning to sell some or all of these shares. If Metro does sell, investors should consider making a similar move.
Couche-Tard has been on a consolidation binge in recent years – including its $4.4-billion (U.S.) deal for CST Brands Inc., which closed in June – that has raised its store count to more than 15,000 worldwide.
Long-term investors who bet that the convenience-store industry stands to benefit from scale have certainly been rewarded for their optimism: Couche-Tard shares have tripled in value over the past five years, rising above $68 (Canadian) in August, 2016.
But the shares have since tumbled about 15 per cent from this high point, and have been drifting sideways for most of this year amid concerns over whether electric cars and automated vehicles will erode the need for pit-stops at roadside stores.
As well, Couche-Tard is not producing eye-popping financial results to justify the stock's lofty valuation. In its last quarterly report, released earlier this month, revenue rose 17 per cent over the same period last year. However, this was attributable to expansion. When you focus on merchandise sales at stores open for at least one year (same-store sales), growth slowed to a mere 1.4 per cent in the all-important U.S. market, down from 2.4-per-cent growth in the same quarter last year.
In Canada, same-store sales on merchandise actually declined year-over-year, suggesting sluggish consumer spending.
Profit rose 14 per cent, to 64 cents a share, but the results were more or less in line with analysts' expectations. Meanwhile, the shares trade at 21 times trailing profit, which is pricey.
What will Metro do with its Couche-Tard shares? If the grocer sells, it suggests it sees better opportunities elsewhere.