National Post (National Edition)
METRO, JEAN COUTU IN MERGER TALKS
EXCLUSIVE DISCUSSIONS FOR $4.5B DEAL
TORONTO • The long-anticipated merger of two Quebec-based retail giants could be happening, after grocery chain Metro Inc. indicated it’s keen to buy pharmacy retailer Jean
Coutu Group Inc. for $4.5 billion. News that Canada’s third-largest grocery retailer was in exclusive talks to acquire Quebec’s biggest pharmacy chain for $24.50 per share is a deal industry insiders and investors had been waiting for since Metro was outbid by Empire Co. for the Safeway chain in June 2013. Just weeks later, Loblaw announced its blockbuster $12.4 billion acquisition of Shoppers Drug Mart, and the market has wondered ever since how Metro would respond.
“For Metro, it was very expected,” said, Sylvain Charlebois, dean of the faculty of mangement at Dalhousie University. “(Chief executive) Eric La Fleche is running a very good business right now and Jean Coutu will only elevate its brand across the region.”
Metro has the lowest exposure to retail pharmacy of the big three Canadian grocers.
Metro operates about 260 outlets under banners such as Brunet and Drug Basics. And investors have been calling for a deal since early 2013, when Metro sold 48.2 per cent of its longstanding investment in convenience store operator Alimentation Couche-Tard.
Such a merger would also likely be viewed favourably within Quebec, analysts say, where mergers or takeovers by out-of-province interests have been a political lightning rod over the years. The takeover of Rona Inc. by U.S.based Lowe’s Cos. finally happened in 2016 after an initial bid in 2012 was met with stiff opposition in the province. And many lamented when restaurant chain Cara, operator of Swiss Chalet, bought out the beloved St. Hubert chicken chain last year.
Ninety per cent of Jean Coutu’s 419 drug stores are in Quebec, with the remainder in New Brunswick and Ontario. “You are looking at two companies who are both very heavily committed to Quebec, and they understand the market very well,” Charlebois said.
Until now, industry watchers viewed the Coutu family as the biggest impediment to such a deal: the company’s dual-share voting structure gives the family a majority stake in voting rights.
Patriarch and chairman Jean Coutu, 90, and his son, current CEO François Coutu, had repeatedly said over the years that the company is not for sale. Nephew Jean-Michel Coutu, executive vice-president of retail operations, was tapped as a likely successor. But the Coutu family supports the proposed offer from Metro, the statement said Wednesday.
What changed? The retail environment has only grown more competitive since 2013, and Walmart and Costco have taken up an ever-growing share of the grocery and pharmacy markets, but those factors have persisted for years. But the Amazon purchase of Whole Foods last month might have made Metro a more ardent suitor.
In Jean Coutu’s case, the news comes two months after the Quebec government announced it would cut its generic drug budget by about 35 per cent, a move that stood to hurt Jean Coutu’s generic drug business, Pro Doc, and squeeze the retailer’s profits.
“It’s a win-win for the long term,” Alex Arifuzzaman of Inter-Stratics Consultants said of a proposal consisting of 75 per cent cash and 25 per cent Metro’s shares.
Much like Loblaw’s purchase of Shoppers Drug Mart, such a deal would give Metro access to Jean Coutu’s smaller-footprint urban retail locations, Arifuzzaman said, and will allow the companies to cross-merchandise the strongest performing products between the stores.
Arifuzzaman expects such a deal would be approved by the Competition Bureau.
The announcement, which represents a six-per-cent premium to Tuesday’s closing Jean Coutu share price, came after both shares were halted Wednesday morning. At close, Jean Coutu’s shares were up 6.3 per cent, while Metro stock added 8.8 per cent.