How Couche-Tard’s ambitious effort for French Carrefour was diminished

Every January in the magnificent Palace of Versailles, President Emmanuel Macron hosts a conference called “Choose France” to convince the heads of large multinational corporations that there is no better country to invest in.

When one of Canada’s largest companies, Alimentation Couche-Tard, made such a choice last week with a € 16.2 billion bid for French supermarket chain Carrefour, the government decided to cut out the chances of a deal. wis.

Just 24 hours after the companies revealed they were in talks, French Finance Minister Bruno Le Maire declared his opposition, calling Carrefour “an important link in the chain that ensures the food security of the French people”. Couche-Tard, a $ 33 billion group that operates convenience stores and gas stations in North America and Europe, struggled with its grip on a deviant deal.

Alain Bouchard, the billionaire’s founder and chairman, flew to Paris for a meeting to convince Le Maire that the company would be a good owner for Carrefour, while Canadian politicians, including Quebec’s economy minister, phones worked.

It was in vain. The 72-year-old entrepreneur was sent to Laval, Québec, in 1980, where he founded Couche-Tard, best known for its Circle K chain. Late Saturday, the companies conceded that the talks were settled, but insisted they would investigate. operational partnerships.

The drama of short-lived time fascinated the French business elite, while soon fulfilling the promise of a payday for some of the leading investment banks and law firms in Paris. Couche-Tard was advised by Rothschild, where Macron worked from 2008 to 2010. Rival Lazard advised Carrefour.

The saga has also sparked a debate over whether France is as open to business as Macron once promised. By branding a takeover of Couche-Tard as a risk to France’s “food sovereignty”, some executives and bankers are concerned that the government’s ability to attract foreign investors is causing lasting damage.

“How can you tell me that France is investor-friendly and is going to do something like that?” said one person involved in the deal. “Protectionism may be politically popular, but it’s bad for the country in the long run.”

A far-reaching plan

Despite the reputation of protectionism, it is relatively rare for France to block a foreign takeover. In recent years, steelmaker Arcelor, telecommunications specialist Alcatel-Lucent, cement giant Lafarge and energy group Technip have all been snapped up by buyers from outside France. According to a study by EY, in 2019 the country was the largest destination for foreign direct investment in Europe.

A longtime ally of Mr. Macron and adviser to many French companies said the failure of Couche-Tard’s gambit was more due to poor timing than any fundamental change in the Elysée. France was still attractive to investors, the person argued, pointing to labor reforms and tax cuts adopted by Macron’s government.

“The idea that the government will stand while the largest private employer in France is sold to a foreign buyer amid a pandemic and a year before a presidential election, is simply far-fetched,” the person said.

“Carrefour is a very visible asset in France – everyone from the unions to the farmers who provide their milk, cheese and meat would be armed,” they added.

Couche-Tard, which anticipated such concerns, planned to allay them by offering the deal as a way to create a French-speaking global retail powerhouse better equipped to compete with Amazon. According to people close to the group, he promised to invest € 3 billion over five years and not reduce jobs for two years, and maintain double listings in Toronto and Paris.

Given how fast foreign takeovers can become political in France, companies sometimes keep quiet about transactions by officials to determine their response. In 2005, there were rumors that PepsiCo would weigh up a bid for yogurt maker Danone, promising then-Prime Minister Dominique de Villepin to protect the company in the name of ‘economic patriotism’. A bid never materialized.

Months later, France adopted a decision giving the government the ability to block takeovers by foreign buyers in sectors considered strategic, such as defense and security. It is a definition that has gradually expanded to include energy, water and telecommunications. In 2019, ‘food security’ was added, creating the legal tool that will eventually thwart Couche-Tard.

Pascal Bine, an M&A specialist at law firm Skadden, Arps, Slate, Meagher & Flom, said the Covid-19 crisis had made the government more willing to block takeovers that could threaten the country’s supply chains. In December, it rejected the US group Teledyne’s attempt to buy Photonis, a manufacturer of night-vision goggles for military use.

‘With the health crisis, there is a new doctrine on foreign investment in France. “More attention is being paid to ensuring that France has important goods such as medical equipment and food, and the proposed Carrefour agreement does raise questions about sovereignty,” he said. Bine said.

“Legally, nothing has changed, but culturally something has changed. . . do not forget that the revolution in 1789 started partly due to bread shortages, ”he added.

With the disruption of the stock price pandemic, other countries were also uneasy about possible foreign takeovers. In November, the UK expanded its ability to review acquisitions of any size in 17 key sectors, while the EU sought similar new powers and expressed concern about state-backed Chinese buyers.

Carrefour’s Unwanted Discount

If the French government could not undermine the Couche-Tard agreement, Carrefour’s board and management were prepared to consider it.

Instead, Carrefour CEO Alexandre Bompard will have to keep cutting costs to improve profits as he seeks to reduce sales at his large-format stores, known in France as hypermarkets. restrict. The company’s shares fell 6 percent on Monday.

Bompard earned three years of credit for selling assets in China and expanding the group’s e-commerce business. But since most cost savings are going to pay for restructuring, margins have barely come up.

Carrefour shares have long traded at a discount compared to those of other major food retailers such as Tesco or Walmart, reflecting intense competition in France, where it still earns half of its sales. With a market share of 20 percent, it is the second largest player in France behind privately owned E Leclerc.

Fabienne Caron, analyst at Kepler Cheuvreux, said the valuation gap would be so much more difficult now that a foreign takeover is off the table and regulators have previously frowned on domestic consolidation. “The most important lessons this week are that no foreign company can buy a French food retailer, and that Carrefour is for sale,” she said.

The lessons were not lost on Carrefour’s three largest shareholders, who together own about 23 percent of the stock. The group includes France’s richest man, founder of LVMH, Bernard Arnault, and the Moulin family behind the department store group Galeries Lafayette.

According to people familiar with the matter, they were willing to sell their interests to help deal with the Couche-Tard.

They were dissatisfied with government intervention, says one person familiar with their thinking, especially since they have long supported Mr Macron. Spokesmen for Mr. Arnault and the Moulin family declined to comment.

Although painful, it is unlikely that Couche-Tard’s French piece will stifle his ambitions. Under Mr Bouchard, the group has completed nearly 40 acquisitions in the fragmented shopping center over the past decade. The ruthless transactions made by 2019 the largest listed company in Canada.

Couche-Tard’s move for Carrefour was aimed at reducing its strong reliance on petrol sales, which is expected to decline in the coming decades as electric vehicles become widespread.

A solid balance sheet definitely gives the company the license to shop. According to Barclays analysts, the group’s net debt-to-ebitda ratio for 2020 was 0.9 times and would be 0.5 times this year.

Stephen Groff, a portfolio manager at Cambridge Global Asset Management, which owns Couche-Tard shares, said the group’s record gave it the right to seek a major deal, even though the approach for Carrefour was a big surprise.

“They are a very effective operator with a decentralized mindset that enables them to adapt to different market conditions around the world,” he said.

But “shareholders are likely to want more clarity on their long-term ambitions, this is a different path than many people expected.”

Additional reporting by Kaye Wiggins in London