Fixed Income Quarterly—Retailing/Consumer Products Page 3
videos since none of the major grocers has an online food offering. That said, prices on amazon.ca are not as low as consumers may expect, which likely will mute the impact of Amazon. In automotive, if Amazon can provide consumers with competitive prices, it could become a threat to Canadian Tire. Walmart plans to expand on its e-commerce offering walmart.ca in 2014.
Online retail sales have grown by over 30% since 2009 to over $20 billion in 2013. Online sales are expected to grow 65% over the next five years to over $33 billion (Forrester Research/ DBRS).
Further Grocery Retail Industry Consolidation? – Now that Safeway Canada has been acquired by Sobeys, there is not much else remaining of size in the grocery industry for ac- quisition. Metro Inc. has historically signalled its willingness to make further acquisitions, but there is no obvious grocer available to acquire at this time.
Ethnic Retailing – We continue to expect ethnic food retailing growth to accelerate in the coming years. Those retailers that recognize and act on this trend should benefit. Loblaw acted early to enter the ethnic food segment with its purchase of T&T Supermarkets in 2009.
Retail Real Estate Strategy – Both Loblaw and Canadian Tire sold real estate into newly public real estate investment trusts with the aim to optimize their capital structures. As a result, we anticipate reduced new issuance out of the traditional retail
Chart 1: Food Retailers – 5-Year Indicative Spreads bps
500
450 Metro 400 Weston
entity (absent M&A transactions) as REIT structures begin to issue unsecured debt. We think the strategy is notionally negative for existing bondholders due to increased capital structure complexity, structural subordination of real estate assets and the beginning of a trend to monetize real estate holdings, which diminish asset coverage.
Shareholder Activism – Recent events at Tim Hortons in 2013 illustrate the emerging trend of shareholder activism to boost share price.
New Issuance – The retail sector primary new issuance re- turned to life in 2013, driven by M&A activity. Sobeys issued $1.0 billion in July 2013 to help fund its purchase of Canada Safeway. Loblaw issued $1.6 billion on September 5, 2013, to help fund its purchase of Shoppers Drug Mart. As well, Tim Hortons issued $450 million in November 2013 to help fund its share repurchase program.
Tim Hortons also issued $450 million in late March 2014 in the 5-year term to complete its funding for its planned share buyback activity.
We expect that Metro Inc. will eventually return to the bond market in the near term as it strives to restore its leverage to more normal levels of ~2.5x from the current 2.0x level. The company has the capacity to add up to $350 million of debt to restore leverage to ~2.5x (S&P methodology), assuming a modest decline in EBITDA in 2014.
Chart 2: Other Consumer Products/Retailers – 5-Year Indicative Spreads
Loblaws
0
Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13
As at March 31, 2014 Source: BMO Capital Markets
bps 500 450 400 350 300 250 200 150 100
50
Can Tire Molson Coors Shoppers
350 300 250 200 150 100
50
0
Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13
As at March 31, 2014 Source: BMO Capital Markets