Sobeys’ second chance
It’s not often that a CEO, in announcing a takeover, vows that “we will not screw this up.” That’s the promise made by Michael Medline, turnaround CEO of Sobeys Inc., in unveiling his firm’s $800-million acquisition of the Ontario-based Farm Boy grocery chain. Sobeys notoriously did screw up its $5.8-billion purchase of Canadian Safeway. Sobeys made rapid changes at Safeway that alienated customers, resulting in a $2.1-billion 2016 loss for Sobeys parent Empire Co. Ltd. But that was pre-Medline, a recruit from Canadian Tire (CTC). Medline oversaw the textbook-superb handling of CTC’s Mark’s Work Wearhouse (now Mark’s) and Forzani Group acquisitions, including the Sport Chek chain, which have all retained their stand-alone status. Farm Boy will also remain semi-autonomous, not integrated with Sobey banners Sobey’s, IGA, Safeway and Fresh. But it will piggyback on Sobeys real estate, purchasing and distribution heft, enabling it to grow with prime locations made possible by Sobeys. Medline describes Farm Boy as a “jewel,” and he’s right. With just 26 stores, Farm Boy generated $500 million in revenue last year due to above-average profit margins, in turn possible because of fierce customer loyalty to Farm Boy’s pre-made fresh meals and relatively small, intimate stores. And Farm Boy’s same-store sales growth of 5.3 per cent last year compares with an industry average of just 1.3 per cent. The stock of Empire Co. Ltd. is worth a second look for investors put off by the Safeway debacle. Though Empire shares have made an impressive recovery from their 2017 nadir, the stock is still trading 25 per cent below its 2015 peak. And Empire’s 2017 profits were 62 per cent below their 2015 level, pointing to significant upside potential.
Even with Rangold, Barrick looks dicey
There’s much to like about gold producer Barrick Gold Corp.’s approximately $6-billion (U.S.) blockbuster purchase of its peer, Rangold Resources Ltd. The deal boosts Toronto-based Barrick’s reserves to 78 million ounces and its annual gold production to more than six million ounces. The combined firm also benefits from low cash costs of $538 (U.S.) per ounce, against a current gold price of about $1,200 (U.S.) per ounce. The problems, though, start with Rangold’s exposure to Africa, home to most of its reserves and production. Rangold’s portfolio is located mostly in the politically unstable Senegal, Mali, Côte d’Ivoire and Democratic Republic of Congo (DRC). High-ranking DRC officials have already expressed discontent with the Barrick takeover. Mali, of course, is a conflict region to which Ottawa has committed peacekeeping forces. Barrick also is a heavily indebted firm. At a capital-intensive firm like Barrick, high and rising interest rates — to which the U.S. Federal Reserve Board has just recommitted — can be crippling. Possibly worse, higher rates paid by low- or no-risk fixed-income securities make them a more attractive rival to gold for investors. The bet for gold investors is that geopolitical conditions will worsen, driving goldbugs to bulk up on the yellow metal as a hedge against chaos. But during the past eight years — a time of the failed “Arab Spring,” the European economic crisis, Russia’s encroachment on Eastern Europe and a North Korea threatening the U.S. with nuclear annihilation — the gold price collapsed about 40 per cent to its current level. Which explains why Barrick stock, at about $15 (Cdn) after a bounce from the Rangold deal, still trades at 72 per cent below its 2011 level of $54 (U.S.).
A Brexit-imperiled U.K. car industry
Leaders of the automakers that make vehicles in Britain are warning that their U.K. operations are in jeopardy if Brexit results in Britain quitting the single market and customs union of the European Union (EU), a scorched-Earth outcome referred to as a “hard Brexit.” Jaguar Land Rover (JLR), Britain’s biggest automaker, owned by India’s Tata Motors, has already put more than 2,000 workers at its West Midlands plant on a three-day week, citing Brexit a top worry. JLR has also put on indefinite hold plans to build electric vehicles (EVs) in Britain, the country’s bid to be at the forefront of a transportation revolution. Toyota Europe’s CEO says a hard Brexit in which the U.K. loses tariff-free access to the EU will mean the end of Toyota’s vehicle production in the U.K. — at a Derbyshire plant that employs 2,600 Britons, about 90 per cent of whose output is exported to Europe. France’s PSA Group, which owns the Peugeot, Citroen and Opel brands, said this week that production of its Vauxhall brand at U.K. plants in Luton and Ellesmere Point would cease after a hard Brexit. And production of the Mini, that most quintessential of British autos save possibly Rolls-Royce, would shift to the Netherlands, says BMW, the brand’s owner. The U.K. Society of Motor Manufacturers and Traders forecast this week that a hard Brexit would raise vehicle prices for Britons. Ottawa just signed a faulty U.S.-Mexico-Canada Agreement mostly to maintain the health of our auto sector. Its U.K. counterpart enjoys no such concern from a hopelessly fractured British government. Nor do the 186,00 British autoworkers who face an uncertain future.