Every year in January, at the glittering Palace of Versailles, President Emmanuel Macron organizes a conference entitled “Choose France” to convince the leaders of large multinationals that there is no better country in which to invest.
Yet when one of Canada’s largest companies, Alimentation Couche-Tard, made such a choice last week with a € 16.2 billion in auction for the French supermarket chain Carrefour, the government has taken decisive steps to extinguish the possibility of a deal.
Barely 24 hours after the companies revealed they were in talks, French Finance Minister Bruno Le Maire declared his opposition, qualifying Carrefour as “a key link in the chain which ensures food security for the French”. With its grip on a slippery deal, Couche-Tard, a $ 33 billion group that operates convenience stores and gas stations in North America and Europe, has fallen out.
Alain Bouchard, its founder and billionaire president, traveled to Paris for a meeting to persuade Mr. Le Maire that the company would be a good owner for Carrefour, while Canadian politicians, including the Minister of the Economy of the Quebec, were working on the phone.
It was for in vain. The 72-year-old entrepreneur was sent back to Laval, Que., Where he founded Couche-Tard, best known for its Circle K chain, in 1980. Late on Saturday, the companies admitted talks were over but insisted that they would look at operational partnerships.
The short-lived drama captivated the French business elite, while briefly fulfilling the promise of a payday for some of the major investment banks and law firms in Paris. Couche-Tard was advised by Rothschild, where Mr. Macron worked from 2008 to 2010. Rival Lazard advised Carrefour.
The saga has also reignited a debate on whether France is as open for business as Mr Macron once promised. By calling a Couche-Tard takeover 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 do something like that?” said a person involved in the case. “Protectionism may be politically popular, but it’s bad for the country in the long run.”
A far-fetched plan
Despite a reputation for protectionism, it is relatively rare for France to block a foreign takeover. In recent years, steelmaker Arcelor, telecom equipment specialist Alcatel-Lucent, cement giant Lafarge and energy group Technip have all been taken over by foreign buyers. The country was the top European destination for foreign direct investment in 2019, according to a study by EY.
A longtime ally of Mr Macron and adviser to many French companies said the failure of Couche-Tard’s bet was more due to bad timing than any fundamental change in the Elysee’s approach. France was still attractive to investors, the person argued, highlighting the labor reforms and tax cuts adopted by Mr Macron’s government.
“The idea that the government would stand up as France’s biggest private employer was sold to a foreign buyer in the midst of a pandemic and a year before a presidential election is simply overblown,” the person said.
“Carrefour is a very visible asset in France – everyone from the unions to the farmers who supply their milk, cheese and meats, would have been angry,” they added.
Anticipating such concerns, Couche-Tard planned to assuage them by presenting the deal as a way to forge a French-speaking global retail powerhouse better equipped to compete with Amazon. He has pledged to invest 3 billion euros over five years, not to cut jobs for two years, and to maintain double registrations in Toronto and Paris, according to people close to the group.
Given how quickly foreign takeovers can become political in France, companies sometimes quietly make deals through officials to gauge their reaction. In 2005, PepsiCo reportedly weighed up an offer for yogurt maker Danone, prompting then Prime Minister Dominique de Villepin to promise to protect the company in the name of “economic patriotism”. An offer never materialized.
Months later, France passed a decree giving the government the ability to potentially block buyouts by foreign buyers in sectors deemed strategic, such as defense and security. It is a definition that has gradually broadened to include energy, water and telecoms. In 2019, “food safety” was added, creating the legal tool that would eventually thwart Couche-Tard.
Pascal Bine, mergers and acquisitions specialist at law firm Skadden, Arps, Slate, Meagher & Flom, said the Covid-19 crisis had made the government more willing to block buyouts that could threaten supply chains from the country. In December, he rejected an offer by US group Teledyne to buy Photonis, a manufacturer of night vision goggles for military use.
“With the health crisis, a new doctrine is emerging on foreign investments in France. More attention is being paid to ensuring France’s supply of essential goods such as medical equipment and food, and the proposed agreement with Carrefour raises questions about sovereignty, ”Bine said.
“Legally, nothing has changed, but culturally something has changed. . . do not forget that the revolution of 1789 started in part because of the shortages of bread, ”he added.
With the disruption of the pandemic that hit stock prices, other countries have also been worried about possible foreign takeovers. In November, the UK expanded its ability to review takeovers of any size in 17 key sectors, while the EU sought similar new powers and expressed concerns over state-backed Chinese buyers.
Carrefour unwanted discount
If the French government could not support the Couche-Tard deal, Carrefour’s board and management were ready to consider it.
Instead, Carrefour CEO Alexandre Bompard will have to continue cutting costs to improve profits, while trying to stem a multi-year decline in sales at its large format stores, known in France as hypermarkets. The company’s shares were down 6% on Monday.
Three years after the start of a five-year turnaround plan, Mr. Bompard obtained a loan for the sale of assets in China and the expansion of the group’s e-commerce activities. But with most of the savings in restructuring costs, margins barely budged.
The Carrefour title has long been traded at a discount compared to that of other large food distributors such as Tesco or Walmart, reflecting the intense competition in France, where it still achieves half of its sales. With 20% market share, it is the second French player behind the private company E Leclerc.
Fabienne Caron, analyst at Kepler Cheuvreux, said closing the valuation gap will be all the more difficult now that a foreign takeover is irrelevant and regulators have previously frowned on domestic consolidation. “The main lessons from this week are that no foreign company can buy from a French food retailer and Carrefour is on sale,” she said.
The lessons have not been lost for the three main shareholders of Carrefour, who together control around 23% of the capital. The group includes the richest man in France, LVMH founder Bernard Arnault, and the Moulin family behind the Galeries Lafayette department store group.
They were ready to sell their stakes to help with the Couche-Tard transaction, according to people familiar with the matter.
They were unhappy with the government’s intervention, said a person familiar with their thinking, not least because they have long supported Mr Macron. Spokesmen for Mr. Arnault and the Moulin family declined to comment.
Although painful, Couche-Tard’s French snub is unlikely to undermine his ambitions. Under Mr. Bouchard’s leadership, the group has completed nearly 40 takeovers over the past decade in the fragmented convenience store sector. The relentless trading had, by 2019, made it the largest publicly traded company in Canada by revenue.
Couche-Tard’s decision for Carrefour was aimed at reducing its heavy reliance on gasoline sales, which are expected to decline over the coming decades as electric vehicles become more widespread.
A strong balance sheet certainly gives the company permission to shop. According to analysts at Barclays, the group’s net debt to ebitda ratio for 2020 was 0.9 times and is expected to be 0.5 times this year.
Stephen Groff, portfolio manager at Cambridge Global Asset Management who owns the shares of Couche-Tard, said the group’s record earned him the right to seek a major deal – although Carrefour’s approach came as a big surprise .
“He is a very efficient operator with a decentralized mindset that has allowed them to adapt to very different market conditions across the world,” he said.
But “shareholders are likely to want more clarity on their long-term ambitions given that this is a different path than many expected.”
Additional reporting by Kaye Wiggins in London