MONTREAL -- The pending purchase by Metro here of A&P's Canadian stores will transform Metro from an also-ran to a major player in the Toronto marketplace -- a change that could eventually inject more pricing pressures both in Ontario and its home province of Quebec, analysts told SN last week.
The acquisition could also enable Metro to become more aggressive in store expansion, butting heads with Loblaw and Sobeys for new locations, they said.
The $1.5 billion acquisition by Metro of A&P's 236 Canadian supermarkets and five distribution centers -- all in the Toronto marketplace -- is expected to close in the next 10 days. The acquisition will mark Metro's first entry into Toronto; its 47 existing Ontario stores are located primarily in the Ottawa Valley in eastern Ontario, about 250 miles northeast of Toronto.
Once the deal is completed, analysts said Metro's share of food sales in Ontario will jump to 21%, compared with just 2% prior to adding A&P's 19% share -- moving it past Sobeys, Stellarton, Nova Scotia, which has a 12% share, and second to the 42% controlled by Toronto-based Loblaw.
Robert Sbrugnera, director of treasury and investor relations for Metro, told SN the company has not made any decisions on what it will do after the deal is finalized. "Right now our priority is closing the deal. After that we'll look at potential banner and warehouse rationalizations and other possibilities."
Analysts said they expect Metro to retain A&P's Dominion and Food Basics banners in Ontario and to convert its own Super C discount stores there to the stronger Food Basics banner. Some said they also expect Metro to retain all five A&P warehouses, while Perry Caicco, an analyst with CIBC World Markets, Toronto, said Metro may need to close at least one facility, in eastern Ontario, where it already operates a warehouse.
Besides Metro, one analyst said the big winner in the A&P deal was Loblaw. "The combination of Metro and A&P was one of the best outcomes for Loblaw because Metro is viewed as a more rational chain. If Sobeys had purchased A&P, it might have been more willing to take deep discounts to build market share," he said.
However, another analyst said the Metro-A&P deal could spark increased price competition "because Loblaw is investing heavily in efficiencies, and once it gets costs down, it plans to pass those savings along in lower prices; Sobeys is investing in logistics that will enable it to become more competitive, and now Metro will be able to get better pricing.
"Ontario and Quebec are Canada's most populous provinces, so Metro will pick up a big chunk of the country's population in this deal, which will give it more buying clout, which will make it a stronger competitor with better pricing -- and the ability to take pricing down over the long term." However, she said she doesn't expect Metro to attempt to move prices downward immediately, "but over time that could happen."
Caicco agreed. "Metro's new buying clout means Loblaw and Sobeys could begin hearing footsteps," he said.
Beyond price competition, a real-estate rivalry could heat up, analysts said. Metro plans to re-energize its store growth schedule, Caicco said, which is likely to have some impact on Loblaw and Sobeys. "If Metro increases the number of store openings in Ontario, as it's indicated it will, and if Sobeys continues to open stores as it has been doing, then they are likely to bump heads more and more often. And Loblaw, which is used to dealing with fewer competitive store openings, could see more square-footage competitive pressures as well."
Metro, a major player in Quebec, established a small beachhead in Ontario in 1999 when Loblaw sold it 39 stores it was forced to divest after acquiring Provigo, "and there's been a feeling ever since that because Metro was operating in a single geographic region, it ran the risk of not being diversified enough to maintain its earnings base if Loblaw or Sobeys ever decided to get very aggressive," one analyst pointed out. "But now that it's broadened its reach into Toronto, Metro has a bigger platform and a better ability to grow."
Another analyst said Metro needed to make the A&P acquisition "and pay up to do it because it was its last opportunity to do something strategically to save itself. The most logical place for an acquisition was Ontario because that's Canada's largest market, and the most logical company for Metro to acquire was A&P, because it gives Metro the market diversity to compete."
Analysts said the sale of A&P has reduced the number of potential consolidation prospects down to two -- British Columbia-based Overwaitea and the Canadian division of Safeway, both operating in western Canada. Overwaitea would have been a less positive acquisition partner for Metro than A&P "because the West doesn't have the population that Ontario does," one observer said, "and anyone who acquires the Safeways, if they become available, would have to put a lot of money into them."
Until the deal with Metro was disclosed late last month, most Canadian observers had expected Sobeys to acquire A&P. "Sobeys wanted those stores, and it was extremely aggressive in its bidding," Caicco said. "But Sobeys is largely family owned, and it wasn't offering any stock, whereas Metro was willing to allow A&P to take a major ownership position by selling 18 million shares -- close to 15% of its outstanding stock -- which will make A&P one of Metro's three largest shareholders."
Sobeys' failure to acquire A&P was a big blow, Caicco added. "Sobeys operates in all four regions of Canada, but Ontario is the region where it is weakest by far, with a spread-out store base and more distribution and administrative capabilities than it needs, plus few assets in the lucrative Toronto market. So an acquisition of A&P by Sobeys would have solved a huge problem for the company by making its least profitable market profitable."