Good morning. But enough about today.
A lot of our attention this week will be fixed on Wednesday, when the Bank of Canada is widely expected to cut its key lending rate for the third time since June, and Alimentation Couche-Tard Inc. reports quarterly earnings amid recent news that it’s trying to buy the Japanese parent company of 7-Eleven. More on that below.
Up top
Headlines
Writeoffs on the rise: The federal government approved a sharp spike in large corporate writeoffs last year, with 11 companies receiving $1.2-billion in combined writeoffs for tax debt and other financial obligations, new figures show.
For sale: Brookfield has put London’s Citypoint tower up for sale after a brutal two-year downturn in the British capital’s office market. The Canadian asset manager is reportedly seeking £500-million.
Postsecondary pressure: Protests, housing shortages, caps on international students, and a drop in public opinion put schools across Canada to the test.
Das auto: Nein? Volkswagen is considering closing factories in Germany for the first time, in a move that shows the mounting price pressure Europe’s top carmaker faces from Asian rivals.
Happening today
- Both Canada and the United States get a view on August’s business activity in manufacturing through the S&P Global Purchasing Managers’ Index and the U.S. Institute of Supply Management index.
- Intel unveils its next-generation Core Ultra chip, codenamed Lunar Lake.
This week
Wednesday: BoC’s rate decision at 9:45 a.m. ET. Dollar Tree reports before markets open. Couche-Tard reports after the close.
Thursday: Statistics Canada reports second-quarter labour productivity. The ADP’s U.S. employment report will provide insight into private-sector job growth.
Friday: More U.S. jobs data will give markets clues for how aggressively the Fed might move in bringing down its own benchmark lending rate. Earnings include Bombardier Recreational Products, maker of snowmobiles, ATVs and boats. New York Fashion Week officially opens.
In focus
Couche-Tard’s bid faces inconvenient obstacles
The scene at a 7-Eleven in central Tokyo last week.RICHARD A. BROOKS/AFP/Getty Images
The sugar high:
The news hit the markets like they had mainlined a Big Gulp: Canada’s Alimentation Couche-Tard was seeking to buy the Japanese parent of 7-Eleven. As the Montreal-based company reports its quarterly earnings tomorrow, executives could offer signs of just how far they’re prepared to go in a deal that would make history on several fronts:
- The acquisition would represent the largest takeover of a Japanese company by a foreign entity.
- A successful takeover bid would make the Montreal-based company the most dominant force in the world of convenience stores.
- It would easily make for the company’s largest acquisition since its inception in 1980.
- The deal would likely require the largest stock offering ever seen in domestic capital markets.
It’s all exciting stuff, depending on your perspective. If your perspective is coming from the executive suites of Seven & i Holdings Co. Ltd., the deal is not so thrilling.
The sugar crash:
The conglomerate is reportedly pressing the Japanese government to designate it as a “core” company, which would include it among those in the nuclear, aerospace and semiconductor industries.
- The company is arguing it plays a critical role in supplying food and supplies in the event of natural disasters.
That dynamic doesn’t preclude a takeover – if anything, the government has loosened regulations around foreign acquisitions – but it sure doesn’t suggest a company keen to sell.
Even as Seven & i has acknowledged that it has set up a special committee to examine the deal, doubts are already emerging that Couche-Tard’s friendly overture will be returned with a smile.
The Japanese company has been the target of shareholder activism for years over its perceived delivery of poor value for investors – putting even more pressure on executives to extract as much as it can from a potential suitor.
That reticence builds on top of some unfavourable math for Couche-Tard:
- Analysts say the Canadian company will need more than US$40-billion to close a deal
- The company has US$2-billion in cash.
- It can borrow up to US$20-billion without harming its investment-grade credit rating.
- That means Couche-Tard still finds itself at least US$18-billion short.
That money would likely come from selling stocks. A lot of stocks. As Andrew Willis recently wrote, potentially the largest stock offering in domestic capital markets “by a country mile.”
And then there are more regulatory hurdles. In the U.S., the addition of 7-Eleven to Couche-Tard’s already big footprint (its banners include the nationwide chain Circle K) would give it about one fifth of the country’s convenience-store market.
All of that amounts to a saga that could stretch out over several months or even years.
It could end a lot quicker, though, if we get a sense tomorrow that Couche-Tard’s executives are already feeling that the vibes are off.
As Willis told me: “If Couche-Tard says anything in the call about being disciplined in their approach to acquisitions, they are signalling that they are prepared to walk.”
Economy
Banking on another cut
Bank of Canada Governor Tiff Macklem is widely expected to lower the bank’s key lending rate for the third time in a row on Wednesday.
After recent data showing that the country’s growth was sputtering through the summer, the only thing economists can’t seem to agree on is the size of the cut in store.
- Most are expecting the bank to lower the rate by a quarter of a percentage point, as it has the past two times, which would bring it to 4.25 per cent.
- But in the wake of that GDP report on Friday, money markets were suggesting that the odds of a 50-basis-point cut grew to 20 per cent from 10 per cent just 24 hours earlier.
Stephen Brown, a senior economist at Capital Economics, said signs the economy will continue to stagnate “leads us to think that we are now close to 50/50″ that the bank will cut by 25 or 50 basis points on Wednesday.
Charted
An electrifying future for a storied steel company
The Globe and Mail
Green steel: The largest employer in Sault Ste. Marie is transforming its coal-fired production processes into a modern operation that emits far less carbon and other pollutants. Reporter Jeffrey Jones and photojournalist Deborah Baic delved into how Algoma Steel is banking on a renaissance with a multimillion-dollar plan to go electric. You can find their story here.
Morning markets
World stocks drifted downward as investors turned cautious ahead of a slew of economic data that may determine how deeply the U.S. Federal Reserve will cut interest rates. Wall Street and TSX futures followed sentiment lower.
Overseas, the pan-European STOXX 600 was down 0.39 per cent in morning trading. Britain’s FTSE 100 dropped 0.48 per cent, Germany’s DAX fell 0.35 per cent and France’s CAC 40 gave back 0.23 per cent.
In Asia, Japan’s Nikkei closed 0.04 per cent lower, while Hong Kong’s Hang Seng slipped 0.23 per cent.
The Canadian dollar traded at 73.84 U.S. cents.