Last year was an exciting one for shareholders of Canadian retailers, as there were a couple of very high profile acquisitions. Sobeys — the largest division of Empire Ltd. (TSX:EMP.A) — got the party started in June 2013, when it announced it would acquire the Canadian operations of U.S.-based grocer Safeway (NYSE:SWY) for $5.8 billion.
Not to be outdone, a month later Loblaw Companies (TSX: L) announced plans to acquire Shopper’s Drug Mart (TSX:SC) for $12.4 billion, further strengthening the chain in general merchandise and pharmacy, two areas of relative weakness for the company. While Loblaw’s shareholders still have to approve the proposed deal, it looks like it’s going to happen.
This year could be another exciting time to be an investor in the Canadian retail sector. Corporate debt is still cheap, the appetite for these deals is still strong, and retailers who have missed out on acquisitions over the past few years won’t want to be left behind. I have a few ideas about who are the next likely acquisition targets.
The North West Company (TSX: NWC) operates primarily in small communities located in Canada’s north, and it’s often the only store in the entire community. It sells everything from food to clothes to hardware, often at prices that would shock those of us who live in the southern part of the country. This gives North West an obvious moat, and makes the company an attractive acquisition target.
North West’s market cap of only $1.25 billion makes it an attainable target for even some of Canada’s smaller retailers, and North West would benefit from being part of a bigger company because it could secure lower prices from suppliers. On the surface, Canadian Tire (TSX:CTC.A) seems like a logical fit, as it has been active in the past few years acquiring both Sport Chek and Mark’s Work Wearhouse.
While Jean Coutu (TSX:PJC.A) has been struggling with declining same-store sales lately, the company still represents an attractive target for a prospective acquirer. It trades at less than 10 times trailing earnings, has a pristine balance sheet with no debt, and is well ingrained in the Quebec market. As Loblaw showed, companies are willing to pay large premiums to get those profitable pharmacy customers, especially as the population ages.
Jean Coutu is controlled by the Coutu family, but the founder is currently 86 years old. If he’s going to be open to selling the company, now would be the time. Additionally, the company recently rid itself of its stake in American pharmacy Rite Aid (NYSE:RAD), which also makes the company a more attractive acquisition target. Metro (TSX:MRU) is also a possibility, since it knows the Quebec market already and watched its two main rivals become much bigger over the summer of 2013.
Liquor Stores N.A.
Liquor Stores N.A. (TSX:LIQ) operates retail liquor stores primarily in the province of Alberta, but also has stores in B.C., Alaska, and Kentucky. The company is currently trading at close to 52-week lows, having been beaten down by the threat of rising interest rates — the company pays a 9-cent monthly dividend, good for a 7.5% yield — and from same-store sales that were slightly down.
The company currently has a market cap of $335 million, with an additional $150 million in debt. EBITDA was $45 million over the last four quarters, making Liquor Stores an investment that could make sense for one of the larger grocery chains that already operates in the space, especially if it could use its brand power to further differentiate the brand from the largely fragmented competition, especially in the Alberta market.
The nice thing about Liquor Stores is that investors get a juicy dividend while they wait for the company to either be acquired or recover.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Nelson Smith has no positions in stocks mentioned in this article.