A&P Sells Canadian Division to Metro

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A&P sells Canadian division to Metro

July 24, 2005

The Great Atlantic & Pacific Tea Co. sold its 236 Canadian stores to the Quebec-based Metro Inc. retail operation this week in a move that was apparently very well received by the U.S. business community.

In Canadian dollars, the deal was announced at $1.7 billion: $1.2 billion Canadian in cash and $500 million Canadian in stock. The infusion of cash will help A&P retire much of its U.S. debt and refurbish many of its stores.

The investment community applauded loudly as the stock rose nearly 10 percent on the news to a 52-week high of more than $32 (U.S.) per share. A&P's stock has been climbing impressively this year, as the company announced plans to sell its Canadian division, renovate its stores and improve its image. In October, the stock was selling for only $6 a share.

The announced sale was met with surprise in Canada as at least one failed suitor claimed that Metro overpaid for A&P. It had been widely rumored that other Canadian retailers were in a better position to buy A&P Canada and would prevail.

One such bidder was Sobeys, which is larger than Metro. Sobeys made a bid for the company but announced at the close of the sale that the bidding was too steep. In fact, in a company-released statement, Sobeys spokesman Andrew Walker said, "We had developed a detailed understanding of [A&P's] assets and the superior synergies that could be uniquely achieved by Sobeys. Our commitment is to build a healthy and sustainable retail food business over the long term, and with that in mind, we have confirmed and concluded that it would be detrimental to Sobeys

Inc. if we were to acquire the A&P assets on the terms disclosed by Metro Inc."

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Analysts agreed that Metro paid a premium, but the general consensus was that it was worth it as it instantly gives Metro more of a national presence. Metro is Canada's third-largest grocery chain and the No. 2 retailer in Quebec. About 90 percent of Metros business was in Quebec, with only a handful of stores in the Ottawa area.

A&P Canada, on the other hand, operates 236 food stores throughout Ontario under the A&P, Dominion, Food Basics, The Barn and Ultra Food & Drug banners, with annual sales of $4.4 billion.

Once the deal is completed, Metro will have 579 food stores, including 283 outlets in Ontario with annual sales approaching $11 billion. With its Metro, Metro Plus, Super C, Loeb and Brunet brands, Metro was a leader in the food and pharmaceutical industries in Quebec and eastern Ontario, with annual sales of $6.1 billion.

Pierre H. Lessard, president and chief executive officer of Metro, announced the deal in a company press release. He said, in part, "We are very pleased to be acquiring A&P Canada, the second- largest food retailer in Ontario, with its strong management team and significant presence in the high- growth greater Toronto area, Canada's largest market. The acquisition, combined with our current operations in eastern Ontario and our leading position in Quebec, significantly enhances Metro's strategic position in Canada's two largest markets. This is a unique opportunity to transform Metro's strong regional base into a significantly larger platform with increased scale and geographic diversification.

The deal, expected to close in August, will give Metro a 16 percent market share nationally, according to the company press release.

As part of the deal, A&P will receive more than 18 million shares of Metro and own a 16 percent share in that Canadian retailer.

In the Metro press release, A&P Chairman of the Board Christian Haub said, "We are delighted to enter into this historic agreement with Metro, and to participate in its future growth and success with a significant investment position.

Mr. Haub was quoted in other news stories as stating that the deal will allow A&P to solve its short- term financial needs while giving the company significant long-term value.