This grocery chain has earned the blue chip label with a long history of profitable operations and dividends. However, it takes on added risk with its acquisition of a major drugstore chain, although it is able to reduce its costs by selling most of it shares in a convenience store chain.
If this acquisition works out as well as a similar deal did for rival Loblaw, it should help Metro Inc. face competitive challenges in the industry and continue to reward shareholders.
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METRO INC. (Toronto symbol MRU; www.metro.ca) operates 600 grocery stores and 250 drugstores, in Quebec and Ontario.
The company will now buy Jean Coutu Group (PJC) Inc. (Toronto symbol PJC.A). That firm operates 419 franchised drug stores in Quebec, New Brunswick and Ontario. It also makes generic pharmaceutical drugs through its Pro Doc business. Under the terms of the deal, Metro will pay $4.5 billion for Jean Coutu—75% in cash and 25% in Metro common shares. The family who holds 93% of Jean Coutu has agreed to tender its shares to the offer.
To help pay for the acquisition, the company has agreed to sell the bulk of its shares in Alimentation Couche-Tard (Toronto symbol ATD.B). (Couche-Tard, which operates convenience stores in North America and Europe, is a recommendation of Stock Pickers Digest, our newsletter that focuses on aggressive investing.)
Those transactions will raise a total of $1.55 billion. Following the sale, Metro will continue to hold 5.1 million of Couche-Tard’s class A multiple voting shares. That represents 3.9% of the total class A shares outstanding (or 0.9% of the total votes).
Blue Chip Stocks: Combined company expects annual revenue to top $15 billion
Separately, the company announced a new plan to modernize its warehouses and distribution in Ontario. That includes building two new facilities in the Toronto area. They will replace aging facilities. The new plants will also use robotic equipment to improve efficiency and let the company cut 280 jobs. That’s less than 1% of its total workforce.
In all, Metro will spend $400 million on the plan. The company expects to complete those upgrades between 2018 and 2023.
Big acquisitions like Jean Coutu add risk. As well, Metro will have to borrow part of the cash it needs. That will push up its long-term debt to around $4.4 billion, or a high 45% of its market cap.
However, Metro expects merging warehouses with Jean Coutu, and cutting overlapping operations, will trim $75 million from its annual costs by the end of the third year. The combined company should have annual revenue of $15.9 billion and free cash flow (regular cash flow less capital expenditures) of $530 million, or $2.04 a share.
The company expects to complete the takeover by mid-2018.
Metro last raised its quarterly dividend by 16.1%, with the March 2017 payment. Investors receive $0.1625 a share, up from $0.14. The new annual rate of $0.65 yields 1.5% Metro’s dividend has grown an average of 17.8% annually over the last 5 years.
Recommendation in The Successful Investor: Metro is a buy.
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I read your daily advice letter every day, it is very informative, I also have a managed account with your firm.I really enjoy your analysis of the companies I continue to learn new everyday !