A&P Sells Canadian Business to Metro; Gains Equity Stake and Much More

MONTVALE, N.J. -- In a move that has Wall Street applauding, the Great Atlantic & Pacific Tea Co., Inc. based here, said yesterday it has agreed to sell its Canadian operations to Metro, Inc., a leading Canadian supermarket and pharmaceutical operator based in Montreal. The $1.48 billion deal leaves A&P with a 15.8 percent ownership stake in Metro, two seats on Metro's board, multiple opportunities for knowledge sharing, and substantial cash proceeds that will allow A&P to focus on strengthening its retail operations in the northeastern United States.

"This is a breakthrough accomplishment for A&P," said A&P chairman and c.e.o. Christian Haub yesterday during a live Webcast. He noted that the $982 million cash proceeds from the sale will fulfill the company's financial objectives by strengthening its balance sheet, improving liquidity, and ensuring more capital to execute its fresh and discount retail formats in the United States. "All told, this represents a major step toward our goal of achieving sustainable profitability by fiscal 2007," he said.

Wall Street seemed to share Haub's enthusiasm. Several analysts congratulated Haub during the Webcast, while A&P's shares jumped almost 10 percent on the New York Stock Exchange, closing at $32.40.

Under the agreement, which is subject to customary conditions and reviews, Metro is paying $1.475 billion, including the $982 million in cash and $409 million in stock, while assuming certain debt. A&P gains a significant investment position in Metro, including a 15.8 percent ownership stake and two seats on Metro's board.

Also as part of the deal, Metro has agreed to pay A&P $20 million a year for two to three years in an IT transition services agreement, noted A&P c.f.o. Mitchell Goldstein during the Webcast.

Haub praised Metro's "outstanding performance track record" as among the best in all of North American food retailing over the past 10 years. "We believe that our relationship will promote best practice exchange that will benefit the operations of both companies over time," he said.

By acquiring A&P Canada, Metro -- a $6 billion retailer and Canada's second-largest supermarket chain -- will move into the competitive Ontario market with 236 A&P, Dominion, Food Basics, The Barn, and Ultra Food & Drug stores. There it will face two of its major competitors, Loblaw and Sobeys.

During the Webcast, Haub stressed that the acquisition doesn't change the strategy A&P outlined in May, when it announced a major strategic restructuring of its business, including the sale of A&P Canada. A&P remains focused on upgrading stores in the Northeast to its discount or fresh-focused formats, he said. "The majority of our stores will be converted to our fresh format because of the locations they're in."

A&P is also still on track to divest 70 of its Farmer Jack and Food Basics operations and support facilities in the Midwest by the end of the fiscal year, Goldstein said.

Haub noted that while some of the cost savings will likely be reinvested in pricing, there will be no "dramatic moves." "We always have to look at what the competition is doing. But we don't want to create an unstable environment. [Decisions on pricing] will be based on what we think we need to achieve, and how it affects our overall strategy," he said. He added that while the company would certainly "pay attention" to any acquisition opportunities that might arise in the United States, it wouldn't be proactively looking.

Last month A&P said it would transfer its distribution to C&S Wholesale Grocers in a move that would add $40 million in annual savings.

--Jenny McTaggart
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