The Montreal-based company announced after markets closed on Tuesday that it was selling 48.2 per cent of its 25-year investment in Couche-Tard to three Canadian banks for $479 million. The net proceeds are estimated at around $380 million.
Chief executive Eric La Fleche said Metro was evaluating how to use the proceeds, including growth investments and returns to shareholders.
Likely acquisition targets are in Canada's grocery or pharmacy sector, including B.C. supermarket chain Overwaitea, Safeway Canada, Rexall pharmacy or Quebec's Uniprix pharmacy.
Keith Howlett of Desjardins Capital Markets also suggested Familiprix and Jean Coutu (TSX:PJC.A) may be contenders.
The analyst said Metro (TSX:MRU) has a track record of "highly effective acquisitions" including Loeb stores, A&P and a stake in specialty retailer Adonis. In the past, it had said it wouldn't sell Couche-Tard shares until it had a good use for the proceeds.
"Our view is that the announced sale of Couche-Tard shares is driven by an identified use of proceeds, not by market timing," Howlett wrote in a report.
Irene Nattel of RBC Capital Markets believes Metro will most likely use the proceeds to buy back its shares and pay down debt.
"We do not believe Metro has an acquisition in its sights at this time," she wrote.
Recent media reports have speculated about a potential sale of a portion of Safeway's 225 stores, but Nattel doesn't believe Metro is "preparing a war chest at this time."
Instead, she suggested Metro could increase its share buy back to the maximum permitted level of six million shares and repay up to $260 million of debt.
Metro earned its stake in Canada's largest convenience store operator after it sold its small convenience store business in 1987. Instead of taking cash, it gained Couche-Tard shares.
"Surely among the best investments the company has made," Nattel added.
She expects Metro will increase its quarterly dividend next week for the 18th consecutive year by 15 per cent to about 24 or 25 cents per share. The pay out rate of 22 per cent would be consistent with the rate over the last seven years.
She raised Metro's price target by $2 to $67, but lowered her earnings forecast for fiscal 2013 and 2014 to reflect the reduction in Couche-Tard (TSX:ATD.B) contribution. Her new EPS target is $4.97 and $5.38 per share respectively.
For the first quarter, she forecasts earnings will rise 13 per cent from last year to $1.14 per share, in line with other analysts, on a one per cent growth in same-store sales.
Howlett expects an 11.6 per cent increase in the dividend,
On the Toronto Stock Exchange, Metro's shares gained 72 cents at $63.42 in Wednesday morning trading. Couche-Tard's shares lost 82 cents at $48.16.