Will Metro go shopping after Couche-Tard selloff?

Metro‘s surprise decision to sell nearly half of its stake in convenience store operator Alimentation Couche-Tard has prompted industry observers to speculate that the grocer is either eyeing an acquisition or looking to reward its shareholders. The Montreal-based company announced after markets closed on Tuesday that it was selling 48.2% of its 25-year investment in […]

Metro‘s surprise decision to sell nearly half of its stake in convenience store operator Alimentation Couche-Tard has prompted industry observers to speculate that the grocer is either eyeing an acquisition or looking to reward its shareholders.

The Montreal-based company announced after markets closed on Tuesday that it was selling 48.2% of its 25-year investment in Couche-Tard to three Canadian banks for $479 million. The net proceeds are estimated at around $380 million.

Chief executive Eric La Fleche said Metro was evaluating how to use the proceeds, including growth investments and returns to shareholders.

Likely acquisition targets are in Canada’s grocery or pharmacy sector, including B.C. supermarket chain Overwaitea, Safeway Canada, Rexall pharmacy or Quebec’s Uniprix pharmacy.

Keith Howlett of Desjardins Capital Markets also suggested Familiprix and Jean Coutu may be targets.

The analyst said Metro has a track record of “highly effective acquisitions” including Loeb stores, A&P and a stake in specialty retailer Adonis. In the past, it had said it wouldn’t sell Couche-Tard shares until it had a good use for the proceeds.

“Our view is that the announced sale of Couche-Tard shares is driven by an identified use of proceeds, not by market timing,” Howlett wrote in a report.

But Irene Nattel of RBC Capital Markets believes Metro will most likely use the proceeds to buy back its shares and pay down debt.

“We do not believe Metro has an acquisition in its sights at this time,” she wrote.

Recent media reports have speculated about a potential sale of a portion of Safeway’s 225 stores, but Nattel doesn’t believe Metro is “preparing a war chest at this time.”

Instead, she suggested Metro could increase its share buy back to the maximum permitted level of six million shares and repay up to $260 million of debt.

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