Loblaw to buy Shoppers Drug Mart for $12.4B

Loblaw Cos. “changes the retail landscape in Canada” with its deal to buy Shoppers Drug Mart Corp. for $12.4 billion.

Loblaw Companies Ltd. said today it "changes the retail landscape in Canada" with its deal to buy Shoppers Drug Mart Corp., including this location at Queen and Carlaw, for $12.4 billion in a cash and stock that merges two of Canada's biggest retailers.

Loblaw Cos. said today it “changes the retail landscape in Canada” with its deal to buy Shoppers Drug Mart Corp. for $12.4 billion that merges two of Canada’s biggest retailers.

Loblaw, the country’s largest supermarket company, will pay $61.54 a share for the leading Canadian drugstore chain, the companies said today in a statement.

That represents a price 27 per cent higher than the last closing price on Friday.

 “This transformational partnership changes the retail landscape in Canada,” Galen G. Weston, executive chairman of Loblaw, said in the statement. “With scale and capability, we will be able to accelerate our momentum and strengthen our position in the increasingly competitive marketplace.”

At an 8 a.m. conference call, executives of both companies explained the benefits.

Consumers are changing, they said: They’re more urban, more pressed for time, older, more tech minded and more concerned with health and wellness.

The integration, said Weston, “will lower the cost of providing health care” through increased buying power.

Loblaw currently has a 1 per cent share of the pharmacy business in Canada dominated by Shopper’s, he said. Shopper’s, meanwhile, sells $1 billion in food, compared with Loblaw’s $30 billion.

“Shopper’s already has food space. We think we can considerably expand the productivity.”

Shopper’s, in turn, can offer Loblaw a network of the “best urban small-format” stores, Loblaw president Vicente Trius said.

“Just imagine being able to go to Loblaws and having the option to buy a wide variety of the products you’d see at Shoppers,” said Trius.

“Or you could go to Shoppers and buy your favourite PC Blue menu items. Imagine a very basic full grocery shop.”

While Loblaw has been opening giant grocery stores in recent years, Shoppers has refurbished its pharmacies to include food. Both face increasing pressure from Wal-Mart and the recent arrival in the country of American retailer Target.

Together, said Weston, Loblaw and Shopper’s feature 65 million square feet of selling space.

In describing the two retail leaders; “complimentary strengths,” the executives listed Loblaw’s PC Financial services and Shopper’s Optimum loyalty program plus each company’s vast supply networks.

“We’re not planning to close any stores,” Weston said at the teleconference briefing. Nor are they planning a large capital investment or much change in the stores’ “footprint.”

Shoppers Drug Mart will keep its name and brand and operate as a separate division of Loblaw. Loblaw’s private label and convenience food will start appearing in the drug stores.

The drug store chain does business in Quebec under the name Pharmaprix.

When the deal is done, Shoppers shareholders will own about 29 per cent of the combined company, Loblaw said in a statement. Weston’s voting ownership will be about 46 per cent of Loblaw’s common shares.

Shoppers shares were up $12.70 or about 26 per cent at $61.10, while Loblaw shares were up $3.45 or about seven per cent at $51 on the Toronto Stock Exchange in early trading, The Canadian Press reported.

The merger will require a two-thirds approval by Shoppers’ shareholders at a meeting in September. Since Weston holds 63 per cent of Loblaw’s common shares, there’s no need for a Loblaw shareholder meeting.

The grocery giant is financing the deal through a $3.5 billion term loan and a $1.6 billion bridge loan plus “available cash resources,” the company’s statement said.

“The combined company’s significant cash flow will allow for rapid debt repayment,” the statement said.

The cash transaction will be partly funded by a $500 million sale of stock to Loblaw’s controlling shareholder George Weston Ltd. Shoppers Drug Mart investors will also receive 0.5965 Loblaw common shares for each share they own.

Canadian retailers are struggling against a backdrop of waning demand amid a cooling housing market and reduced spending growth by households carrying record debts, Bloomberg reports.

Domestic demand in the country rose at a 0.6 per cent annualized pace in the first quarter, the slowest since the first quarter of 2009.

Annual revenue of the combined company would have been more than $42 billion in 2012, according to the statement. Loblaw, based in Brampton, and Toronto-based Shoppers Drug Mart together made earnings before interest, taxes, depreciation and amortization of about $3 billion last year.

Loblaw is paying an equity value of 10.29 times earnings before interest, taxes, depreciation and amortization.