Metro's Lessard goes shopping in Ontario
"A good deal at the right time at the right price."

Late last month while much of Quebec was shut down for the province's famous two-week construction holiday, Metro Inc. CEO Pierre Lessard dropped news of the company's bombshell $1.7 billion acquisition of A&P Canada. The deal was the biggest to hit Canada's grocery industry in the past ten years. For Lessard, it caps an extraordinary career that includes 15 years as Metro's CEO. During that time he turned a money-losing small time Quebec grocery retailer, into a cross country chain with an exceptional earnings and profit growth record. Canadian Grocer caught up with Lessard just before this issue went to press.

You only have two years left on your current contract, after which you were widely expected take a step back from your CEO duties. Why take such a big risk at this stage in your career?

This kind of opportunity doesn't come along often. We've been looking at A&P's assets for almost five years. The companies form an almost perfect fit. Their stores were concentrated in Ontario and ours in Quebec. Over the next 24 months we expect to get $60 million in annual saving from synergies in areas such as merchandizing, distribution, administration and marketing as well much stronger buying power from the combined entity. It was a good deal at the right time at the right price.

What message do you have for A&P Canada employees? Do any of the potential synergies come from management or staff cuts at A&P or Metro?

The negotiation process for the acquisition lasted almost three months. During that time we got a chance to get to know the A&P Canada management team very well. We were very impressed by what we saw and we hope to continue to work with them.

What changes do you have planned at the operational level?

It's a little too early to say right now. A&P's network is in good shape. Hopefully both organizations can learn from each other. We plan to look at both the Metro and A&P operations to determine what each's best practices are and we will extend them throughout the organization. One of our biggest challenges will be integrating our IT systems, which in practice will mean extending Metro's IT system throughout the operation, since A&P's was formerly provided by their parent company.

You have to remember that Quebec and Ontario are different markets. So while for example Food Basics and Super C are both discounters, they have slightly different approaches to target their own consumers. That said, we will probably move our 12 Ontario Super C stores over to the Food Basics format.

Do you plan any store closures?

We plan to open stores not close them. The distribution of Metro stores and those of A&P is very complementary. There is unlikely to be any closures, beyond minor adjustments that have nothing to do with the purchase.

What will be the impact of this deal on the Quebec and the Canadian food industry? Do you foresee any further acquisitions down the line such as Overwaitea or Safeway Canada, should they become available?

The deal means that there are now three major national players on the Canadian grocery retail scene. With our strong base at Metro, we now have the clout to look at new acquisitions if they become available. It has always been our policy to favor Quebec suppliers for our Metro stores. With A&P Canada we will now extend that practice to Ontario suppliers.

Metro paid a lot for A&P Canada. Will this hurt you down the line when it comes to store renovation and upgrade budgets?

Although we did spend a lot of money, the acquisition came at what we feel is a very reasonable price. After the synergies it works out to 7.9 times EBITDA (Earnings Before Taxes Depreciation and Amortization). We bought A&P because we want to give our customers a better offering. So we intend to continue our renovations. Our annual budget capital expenditures should be in the $300 million a year range, which will be more than what the individual budgets of both operations were going to be before the acquisitions.

Why give A&P a financial stake in Metro, plus two board members?

This part of the deal benefited both parties. A&P wanted to remain active in the Canadian grocery market. We get a new partner, which put $500 million in our company, making it our second largest shareholder (after Stephen Jarislowsky). A&P's ownership stake is capped at 19.9% for the next five years.

How do you assess your competitive position with regards to Sobeys?

I think we come away from the deal in an excellent position. The fact that our operations are concentrated in central Canada where you can find two thirds of the country's consumers, gives us enormous advantages in terms of purchasing and distribution of things like flyers and marketing material. We also have an excellent investment grade debt rating and good cash flow.

Peter Diekmeyer can be reached at peter@peterdiekmeyer.com

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