Metro Inc. and Newfoundland Capital Corp. Ltd. are third bananas in their respective sectors in Canada (groceries/pharmacies and radio) and don't tend to make much news compared with their much larger rivals. But the two firms have become the players to watch in their industries after both announced material divestitures on Tuesday. Each is building war chests for deals that will make them more formidable forces.
Metro said Tuesday it is selling 10 million shares, or just under half its stake, in convenience store operator Alimentation Couche-Tard in a bought deal for $479-million. It has been a brilliant investment for Metro, which took shares when it sold a chain of convenience stores to Couche Tard in the late 1980s. That stake, originally worth $75-million, is now worth $1-billion, a sizable chunk of Metro's overall market cap of $6-billion.
Management has repeatedly said it would not sell its Couche-Tard stock "until it had a good use of proceeds," and now appears to have one, Desjardins Capital Markets analyst Keith Howlett said in a research note Wednesday. That includes one of the smaller regional grocery and pharmacy chains that have long been considered takeover targets, including Jim Pattison's B.C.-focused Overwaitea chain, Safeway Canada, or a regional pharmacy chain such as Familiprix.
CEO Eric La Flèche said the company is evaluating how to use the proceeds, "including investments for growth and returns to shareholders." The latter option seems unlikely; it's hard to imagine Metro has held on to its Couche-Tard stake this long just to finance a share buyback or dividend, particularly if it has an opportunity to break out of its base in Quebec and Ontario. With Metro massing cash at the same time as Loblaw Cos. Ltd. prepares to sell a 20-per-cent stake in its expansive real estate assets, long-awaited consolidation in the Canadian grocery business should finally proceed, with Metro playing a key role. It does, however, run the risk of overpaying for the assets given that rival Loblaw may have expansion ambitions of its own.
Newfoundland Capital's planned divestiture is just as significant for the chippy radio operator, controlled by East Coast entrepreneur Harry Steele. It is looking to package off its 32 radio stations, six repeater licences and two TV stations in Alberta and B.C. – more than one third of its total number of broadcasting assets. This is likely a tradeup and not a retreat: Newcap is clearly positioning itself to buy all of the 10 or more radio stations in lucrative major markets that BCE Inc. is expected to sell off for competitive reasons as part of its proposed takeover of Astral Media Inc.
Newcap was previously considered a leading candidate for the stations BCE planned to sell in Toronto, Vancouver and Winnipeg after indicating last year it wouldn't be interested in stations where it already has a strong presence, namely Calgary and Ottawa. However, BCE is likely interested in doing as few side-transactions as possible to satisfy the Canadian Radio-television and Telecommunications Commission, so would favour selling to a single buyer.
By selling off its two stations in Calgary with the package of Western assets – an offering that will attract strong interest – Newcap would be able to swallow all of BCE's stations for sale and could easily sell just one Ottawa station – likely Astral's modestly-rated 106.9 The Bear – to satisfy regulators. Newcap is now clearly the frontrunner to be the main collateral beneficiary of the Bell-Astral deal, assuming the price is right.