Listening to Metro Inc. executives address their shareholders on Tuesday at their annual meeting in a lofty Montreal conference hall was not unlike reading tea leaves. You could foresee the future transaction you were hoping for.
Speculation surrounding a major acquisition by the Quebec grocery chain has been running wild since the retailer pocketed a small fortune by selling close to half of its long-standing stake in the convenience store operator Alimentation Couche-Tard. Once the taxman takes his cut, Metro will have $415-million left in its pockets.
Just about every mid-sized retailer or affiliate in the grocery and pharmacy business has been named as a potential target: Safeway Canada, whose sale would clean up its California parent's balance sheet; Overwaitea Food Group, the B.C. grocery chain; Jean Coutu Group, very present in Quebec, but also in Ontario and in New Brunswick; and the Familiprix group, a network of 300 Quebec and New Brunswick independent pharmacists that doubles as a distributor.
No one seems to believe that Metro sold its Couche-Tard shares because they have had an incredible run in the past year, gaining 70 per cent in the past 12 months – and that the company is simply weighing how to use the proceeds, including growth investments and returns to shareholders. But it didn't help matters that Éric Richer La Flèche, the discreet executive that heads Metro, seemed to enjoy making remarks that could be interpreted this way and that – while always refusing to comment on the potential acquisition rumours.
The Metro president explained that his company had sold Couche-Tard shares because "as prudent managers, it was wise to crystallize profits." Yet Mr. La Flèche spoke of Metro's 65-year history as "punctuated by acquisitions." He later added that Metro's "healthy balance sheet and significant borrowing capacity would allow it to consider any acquisition in Canada."
But if Metro can consider any acquisition in Canada, it doesn't mean it should go after Safeway or Overwaitea if that would spur a costly bidding war with Loblaw Cos. Ltd. The Ontario-based retailer will possess a sizable war chest once its spins out its property assets into a real estate investment trust.
A smaller ethnic grocer such as Adonis, which has spiced up Metro's profits, could provide Metro with more interesting and affordable growth opportunities. And as Canada's immigrant communities are growing, they are the supermarkets' last frontier.
Metro is a great operator with an outstanding track record. Its first-quarter results, which on Tuesday reported first-quarter profit of $121.4-million compared with $103.7-million in the year-earlier period, prove it yet again. Yet the Quebec grocery chain has had it relatively easy in recent years. Its main competitor, Loblaw, was its own worst enemy, struggling with its merchandising and its computer systems. Metro dominates the Quebec market with an estimated 35-per-cent market share among conventional food distributors.
But the market is changing. Wal-Mart Canada is expanding unrelentingly and Target is emerging as a formidable foe from the ruins of Zellers. To say that the competition is heating up is an understatement. These American retailers are shaking a Tabasco bottle over the Quebec and Ontario markets, dotting these provinces with super-sized stores and bountiful grocery aisles.
Target is not considered as serious as a menace as Wal-Mart. Many of Target's stores are located in shopping malls where Metro has exclusivity rights on the sale of food. Wal-Mart, which started sending out food flyers to Quebec homes, is another story.
But even with an acquisition as important and as game-changing as Safeway's, Metro could never "outscale" Wal-Mart or even come close to it. And while Metro has two discount banners, its namesake stores don't venture into price wars nor would they want to go on the American retailers' turf war. By putting the accent on the freshest fruits and vegetables and the best shopping experience, Metro is taking a different tack from its American competitors.
Getting scale in the pharmacy business would make a lot more sense for Metro. As a pharmaceutical distributor and a drugstore operator under the Brunet banner, Metro is a regional Quebec player. Yet for there to be an acquisition, Metro needs a seller. While Jean Coutu is aging, the Coutu family has never expressed the slightest interest in selling the business they control through multiple voting shares. Moreover, they are focusing their energy on Canada after retreating from the American market.
A smaller investment in an ethnic grocer might not be what the analysts and the M&A experts are craving for. But Metro made a killing with Adonis, the Lebanese grocery chain and its Phoenicia distributor whose baba ganoush will soon find a place in Metro counters not too far from St-Hubert's frozen meet pies.
For shareholders, who have seen their dividend go up consistently in the past 18 years, that might be perfectly fine.