Metro to Sell Assets to Fund $3.6 Billion Coutu PurchaseBy and
Quebec grocer seeks to reduce debt, retain credit rating
Companies agree on terms they had been considering last week
Canadian grocer Metro Inc. pledged to sell assets to reduce its financing needs and retain its credit rating as part of a C$4.5 billion ($3.6 billion) purchase of pharmacy chain Jean Coutu Group Inc.
Metro will pay C$24.50 a share in cash and stock for Jean Coutu, about a 6.1 percent premium to Jean Coutu’s price before the two companies announced advanced talks last week. The grocer said Monday it has access to C$3.4 billion in bank credit lines to finance the deal.
“Bringing together our two highly respected and long-standing Quebec brands represents an exciting milestone,” Chairman Jean Coutu said in the statement Monday.
The deal links two giants from Quebec and gives Montreal-based Metro an expanded foothold in the drug business, helping it diversify in an industry under increasing threat from Amazon.com Inc.’s food expansion. Jean Coutu’s earnings have been under pressure because of new provincial regulations on generic drugs, though a compromise was recently found with the government.
Metro will seek permanent financing for the deal and will also consider asset sales, including unloading the 32.2 million shares it owns in Alimentation Couche-Tard Inc., the owner of the Circle K convenience-store chain. That stake is worth about C$1.84 billion at current prices.
“We’re not under pressure, there’s no critical timing, we will do this in an orderly fashion to make sure we maximize proceeds,” Chief Financial Officer Francois Thibault said on a conference call, commenting on Couche-Tard.
The company forecasts a debt to earnings ratio below 3 if it sells its entire stake in Couche-Tard, according to Thibault. The goal is to decrease the ratio to 2.5 percent over the next couple of years, he said. The company also aims to maintain its BBB credit rating.
Jean Coutu rose 1.6 percent to C$24.67 at 10:40 a.m. in Toronto, while Metro fell 0.70 percent to C$42.60. Couche-Tard jumped 0.60 percent to C$57.22.
Cash and Stock
Metro said the purchase includes a 75 percent cash component, with 25 percent in stock. The offer works out to about C$18.38 in cash and 0.15251 Metro share, according to the statement.
The combined company will operate more than 1,300 stores in Canada, with pharmacy operations combined into a stand-alone division. Metro said it expects cost savings of C$75 million within three years.
Canadian grocers, which were locked in a price war and are just coming out of a prolonged bout of food deflation, now have to get ready for Amazon, which in June agreed to buy Whole Foods Market Inc. The U.S. behemoth is also reported to have plans to roll out its Prime Now delivery service for groceries and other items in Canada this year.
The deal requires two-thirds support from Jean Coutu shareholders and already has the backing of the Coutu family who controls the drug store chain.
Bank of Montreal and Canadian Imperial Bank of Commerce advised Metro on the deal, while National Bank of Canada worked with Jean Coutu.
— With assistance by Thomas Mulier