Every January, in the resplendent Palace of Versailles, President Emmanuel Macron organizes a conference called “Choose France” to convince the heads of the big multinationals that there is no better country to invest.
However, when one of Canada’s largest companies, Alimentation Couche-Tard, made that choice last week with an offer of € 16.2 billion through the French supermarket chain Carrefour, the government acted decisively to extinguish the chance of a deal .
Just 24 hours after the companies revealed they were in negotiations, French finance minister Bruno Le Maire declared his opposition, calling Carrefour “a fundamental link in the chain that guarantees the food security of the French people”. With the deal closing in decline, Couche-Tard, a $ 33 billion group that operates convenience stores and gas stations in North America and Europe, went wrong.
Alain Bouchard, its billionaire founder and president, flew to Paris for a meeting to persuade Le Maire that the company would be a good owner for Carrefour, while Canadian politicians, including Quebec’s Minister of Economy, worked on the phones.
It was in vain. The 72-year-old businessman was sent back to Laval, Québec, where he founded Couche-Tard, best known for its Circle K chain, in 1980. On Saturday night, companies admitted that negotiations were suspended, but insisted that would examine operational partnerships.
The short-lived drama captivated the French business elite, while keeping the promise of a payday for some of Paris’ leading investment banks and law firms. Couche-Tard was advised by Rothschild, where Mr. Macron worked from 2008 to 2010. Rival Lazard advised Carrefour.
The saga has also rekindled the debate over whether France is as open to business as Macron promised. In labeling the acquisition of Couche-Tard as a risk to France’s “food sovereignty”, some executives and bankers fear that the government has caused lasting damage to its ability to attract foreign investors.
“How can you tell me that France is investor friendly and is going to do something like that?” said a person involved in the business. “Protectionism may be politically popular, but it is bad for the country in the long run.”
A far-fetched plan
Despite its reputation for protectionism, it is relatively rare for France to block a foreign takeover. In recent years, steelmaker Arcelor, telecommunications equipment specialist Alcatel-Lucent, cement giant Lafarge and the energy group Technip have been acquired by buyers outside France. The country was the main European destination for foreign direct investment in 2019, according to a study by EY.
A longtime ally of Macron and an adviser to many French companies said the failure of Couche-Tard’s move was due more to the bad timing than to any fundamental change of approach at the Elisha. France was still attractive to investors, the person argued, pointing to labor reforms and tax cuts approved by the Macron government.
Alain Bouchard, founder and president of Couche-Tard, flew to Paris for a meeting to persuade the French finance minister that the group would be a good owner for Carrefour © Canadian Press / Shutterstock
“The idea that the government would stand still while France’s largest private employer was sold to a foreign buyer in the middle of a pandemic and a year before a presidential election is simply far-fetched,” said the person.
“Carrefour is a very visible asset in France – everyone, from the unions to the farmers who supply their milk, cheese and meat, would be up in arms,” they added.
Anticipating such concerns, Couche-Tard planned to calm them down by presenting the deal as a way to forge a better armed French-speaking global retail power to compete with Amazon. It has pledged to invest 3 billion euros in five years, without cutting jobs for two years, and to maintain double listings in Toronto and Paris, according to people close to the group.
Given how foreign acquisitions can quickly become a policy in France, companies sometimes quietly make deals with authorities to assess their reaction. In 2005, there were rumors that PepsiCo was considering an offer by yogurt maker Danone, prompting then Prime Minister Dominique de Villepin to swear to protect the company in the name of “economic patriotism”. A move never materialized.
Months later, France enacted a decree giving the government the ability to potentially block acquisitions by foreign buyers in sectors considered strategic, such as defense and security. It is a definition that has been constantly expanding to include energy, water and telecommunications. In 2019, “food security” was added, creating the legal tool that would ultimately frustrate Couche-Tard.
Pascal Bine, a merger and acquisition expert at the law firm Skadden, Arps, Slate, Meagher & Flom, said the Covid-19 crisis made the government more willing to block acquisitions that could threaten the country’s supply chains. In December, it rejected the offer by the American group Teledyne to buy Photonis, a manufacturer of night vision goggles for military use.
Couche-Tard is best known for its Circle K brand © Chris Helgren / Reuters
“With the health crisis, a new doctrine about foreign investment in France appears. More attention is being paid to ensuring that France has supplies of essential goods, such as medical equipment and food, and the proposed agreement with Carrefour raises questions about sovereignty, ”said Bine.
“Legally nothing has changed, but culturally it has. . . do not forget that the 1789 revolution started in part due to the lack of bread, ”he added.
With the disruption of the pandemic hitting stock prices, other countries are also concerned about potential foreign acquisitions. In November, the UK expanded its ability to review acquisitions of any size in 17 key sectors, while the EU sought out similar new powers and expressed concerns about Chinese state-backed buyers.
Unwanted discount from Carrefour
If the French government did not have the stomach for the Couche-Tard agreement, Carrefour’s board and management were open to considering it.
Instead, Carrefour’s chief executive, Alexandre Bompard, will have to keep cutting costs to improve profits, while trying to stem a multi-year drop in sales at its large-format stores, known in France as hypermarkets. The company’s shares fell 6 percent on Monday.
After three years of a five-year recovery plan, Mr. Bompard gained credit for selling assets in China and expanding the group’s e-commerce business. But with most cost savings paying for restructuring, margins have barely moved.
Carrefour’s shares have long been traded at a discount compared to other major food retailers like Tesco or Walmart, reflecting intense competition in France, where it still gets half of its sales. With a 20 percent market share, it is the second largest player in France, behind only private E Leclerc.
Fabienne Caron, an analyst at Kepler Cheuvreux, said closing the valuation gap will be much more difficult now that a foreign takeover is off the table and regulators previously disapproved of domestic consolidation. “The main lesson this week is 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 control about 23% of the shares. The group includes the richest man in France, the founder of LVMH, Bernard Arnault, and the Moulin family, responsible for the department store group Galeries Lafayette.
They were willing to sell their stakes to help in the Couche-Tard business, according to people familiar with the matter.
They were unhappy with the government’s intervention, said a person familiar with their thinking, especially since they have long supported Macron. Spokesmen for Arnault and the Moulin family declined to comment.
Although painful, Couche-Tard’s French contempt is unlikely to shake his ambitions. Under Bouchard’s direction, the group completed nearly 40 acquisitions in the last decade in the fragmented convenience store sector. Ruthless trading had, in 2019, Canada’s largest publicly traded company in revenue.
Carrefour chief Alexandre Bompard gained credit for selling assets in China and expanding the e-commerce business, but most of the cost savings were spent on paying for the restructuring © Christophe Morin / Bloomberg
Couche-Tard’s move to Carrefour aimed to cut its heavy reliance on gasoline sales, which are expected to decline in the coming decades as electric vehicles spread.
A solid balance sheet certainly gives the company the license to make purchases. According to analysts at Barclays, the group’s net debt / ebitda ratio in 2020 was 0.9 times and is projected at 0.5 times this year.
Stephen Groff, portfolio manager at Cambridge Global Asset Management, owner of Couche-Tard’s shares, said the group’s track record earned him the right to pursue a big deal – even though Carrefour’s approach came as a big surprise.
“They are a very effective trader with a decentralized mindset that allows them to adapt to very different market conditions around the world,” he said.
However, “shareholders are likely to want more clarity about what their long-term ambitions are, as this is a different path than many might expect.”
Additional reporting by Kaye Wiggins in London