Canada Grocer Faces Debt in Takeovers
Toronto — Metro Inc., Canada’s third-largest grocer, is considering taking on more debt to fund expansion as sales plunge and it tries to keep up with larger peers that have announced record acquisitions in the past two months.
Metro’s bonds have outperformed its rivals during that period as it remained the only major Canadian grocer that hadn’t announced plans to issue debt to fund an acquisition. Shares of the Montreal-based company dropped the most in more than three years yesterday after it reported the biggest same-store sales decline in a decade in its third-quarter results. Eric La Fleche, Metro’s chief executive officer, said the company was looking at growth strategies that could raise debt levels, which are now among the lowest for food retailers globally.
“I’m a bondholder, so the next move I’m sure won’t be in my favor,” Pascal Garneau, who helps manage $4.8 billion in corporate debt, including Metro bonds, at Industrial Alliance Insurance & Financial Services Inc., said by phone yesterday from Quebec City. “Maybe a dividend to stockholders, maybe they buy something.”
Metro has watched in the past two months as competitor Empire Co.’s stock price surged after it bought Safeway Inc.’s Canadian stores. Shares of Loblaw Cos., the country’s largest grocer, got a boost the day it said it would buy Shoppers Drug Mart Corp., Canada’s biggest pharmacy. La Fleche also opened the possibility Metro could follow Tim Hortons Inc. in issuing debt to return cash directly to shareholders.
“We’re very aware the balance sheet is under-leveraged at the current time,” La Fleche said in a conference call with analysts yesterday. “We will try to grow internally and externally and then, given the strength of the balance sheet, we will look at all capital-structure optimization decisions that make sense for the long term benefit of our shareholders.”
Metro’s debt has outperformed its grocery peers as Loblaw and Empire announced new bonds to fund acquisitions. Metro bonds have lost 2.8 percent since June 12, the day Empire, parent of the Sobeys Inc. supermarket chain, announced the Safeway acquisition, compared to losses of 6.7 percent on Empire bonds and a 3.4 percent decline for Loblaw, according to Bank of America Merrill Lynch data.
Metro’s 2015 bond cost C$106.24 with a yield of 2 percent, or 80 basis points more than government securities, according to Bloomberg prices.
With C$600 million bonds outstanding, Metro’s debt ratio is 0.6 times net debt to earnings before interest, taxes, depreciation and amortization, the fourth-lowest level among global food retailers tracked by Bloomberg. The global average is 1.8 times, the data show.
“They’re arguably under-levered, and from that point of view, the story is not dissimilar to what people thought about Tim Hortons,” Andrew Calder, a credit analyst at Royal Bank of Canada’s RBC Capital Markets unit, said by phone from Toronto. “With a material increase in leverage, whether for an acquisition or a share repurchase, you typically expect to see spreads to widen out.”
Tim Hortons, Canada’s largest coffee-and-doughnuts chain, sent its bonds into free fall and prompted a ratings downgrade last week after announcing it would issue C$900 million of new debt to satisfy demands from activist investors for a share buyback.
The Oakville,Ontario-based company was downgraded two levels to BBB from A (low) by DBRS Ltd. on Aug. 9 as the ratings company estimated Tim Hortons debt level would reach 3.06 times, from 1.69 times.
The yield on the coffee chain’s sole outstanding bond issue, C$300 million of 4.2 percent debt maturing in June 2017, widened 27 basis points to 135 basis points more than underlying benchmarks the day of the buyback announcement and the downgrade, according to RBC Capital Markets prices.
The Canadian grocery business has become more competitive this year with domestic players bulking up to fend off incursions by U.S. retailers.
Bentonville, Ark.-based Wal-Mart Stores Inc. is adding 37 stores to its 379 locations in Canada as it expands fresh- food offerings, while Target Corp., which is based in Minneapolis, rolls out 124 stores in the country.