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Investors step up as Metro steps out of Couche-Tard

Shoppers enter a Metro Inc. grocery store in Toronto, Ontario, Canada, on Monday, Oct. 2, 2017.

Cole Burston/Bloomberg

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 Montreal-based grocer previously dipped into this piggy bank in 2013 by selling $479-million of Couche-Tard stock.

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At the time, Metro management made it clear that they viewed Couche-Tard as a non-core 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 per 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 placements du Québec, and raised $250-million by selling shares back to Couche-Tard, 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.

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U.S. grocer The 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 Capital Markets analyst Irene Nattel.

"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," Ms. Nattel said in a note. Premium multiples are being paid at the moment for convenience store assets but the price Couche-Tard 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.

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