Metro’s $4.5B takeover of Jean Coutu creates Quebec mega-company
Deal will result in $16B annual revenue, 1,300 retail stores and $75M in savings
Two of Quebec’s largest retailers confirmed their longanticipated merger on Monday, with Metro Inc.’s $4.5-billion offer to buy the Jean Coutu pharmacy chain.
The deal will create a combined company with 1,300 retail stores, 87,000 employees and $16 billion in annual revenue, and will result in an anticipated $75 million in cost savings in three years.
“We are honoured to become the steward of the iconic Jean Coutu brand,” Eric La Flèche, Metro’s chief executive, told analysts on a conference call Monday to discuss the deal, in which Jean Coutu Group Inc. shareholders will receive cash and stock worth about $24.50 per share.
“Pharmacy, health and wellness is very much on trend as consumers of all ages are focused on their health and on what they eat. … Clearly the demographics of an aging population, especially in the province of Quebec, favours pharmacy for medication, that’s clear, and for the professional services provided by pharmacists.”
Metro operates grocery stores in Quebec and Ontario, while 90 per cent of Coutu’s s 419 stores are in Quebec, with the remainder in Ontario and New Brunswick.
The deal comes four years after rivals Loblaw and Sobeys bulked up through the acquisitions of Shoppers Drug Mart and Canada Safeway, respectively.
“It was the best opportunity for Metro to gain scale in Canada,” La Flèche told shareholders. “This combined platform positions us well for future expansion and future growth opportunities.”
But the more pressing, industry-altering deal for Jean Coutu investors may have been the purchase of Whole Foods by Amazon in August and widespread uncertainty about the future of retail.
While analysts had long predicted such a deal would make sense strategically, the Coutu family, which has a majority stake in Jean Coutu’s voting rights, were not keen to sell.
A recent announcement that Quebec would cut its generic drug budget by about 35 per cent, a move that would squeeze Jean Coutu’s generic drug unit, made a sale of the family business more likely, analysts said.
“Our view has been that greater clarity around drug reform in Quebec increased the probability of a transaction, subject to the decision of founder Jean Coutu and his family as to the future of their collective involvement in the business,” Keith Howlett, analyst at Desjardins Securities, said in a note to clients last week, when both retailers confirmed that they were in talks.
“Metro has shown itself flexible and effective in working with other family-run businesses such as Adonis and Première Moisson, although they were much smaller than Jean Coutu Group.”
The Jean Coutu division will operate as a stand-alone group run by current CEO François Coutu, son of company founder Jean Coutu. Coutu said Monday that the family made the decision after “long reflection” about the industry consolidation in recent years.
Metro will seek permanent financing for the deal and will also consider asset sales, including unloading the 32.2 million shares it owns in Alimentation CoucheTard Inc., the owner of the Circle K convenience-store chain. That stake is worth about $1.84 billion at current prices.
“We’re not under pressure, there’s no critical timing, we will do this in an orderly fashion to make sure we maximize proceeds,” CFO François Thibault said, commenting on Couche-Tard.
The transaction is subject to regulatory approvals and is expected to close in the first half of 2018.
The Coutu family and their affiliated entities, who hold 93 per cent of the company’s voting rights, have agreed to vote in favour of the deal along with the pharmacy chain’s directors and senior officers.