Marriage of Canadian retail giants
Consumers will see Shoppers, Loblaw products in Galen Weston’s stores,
The $12.4-billion marriage of Canadian retail giants Loblaw Companies Ltd., and Shoppers Drug Mart Corp. came together in an unlikely place — a minivan on a country road northwest of Toronto.
There, Galen G. Weston, executive chairman of Canada’s largest grocery retailer, met with Shoppers chair Holger Kluge this past Thursday and proposed a landmark deal that would dramatically transform the country’s retail landscape.
“A lot of thought and a phone call just a couple of days ago would have been the essence of this deal,” Weston said at a news conference Monday. “The companies have known each other for a long time, but in fact this happened, very, very quickly.”
Conversations went on between the companies for about three-and-a half years, Weston said, but on Monday, the pair made it official.
Loblaw said it is buying Shoppers Drug Mart, Canada’s largest pharmacy retailer, in a friendly deal cash and stock deal, merging two of companies into what Weston called a “Canadian health and wellness and nutrition champion.”
Under the deal, subject to regulatory and shareholder approval, Loblaw will acquire all the outstanding Shoppers Drug Mart common shares for $33.18 in cash plus 0.5965 Loblaw common share per Shoppers common share.
Using the Loblaw closing common share price, that amounts to a 29.4 per cent premium to the pharmacy retailer’s closing stock price on Friday.
Shares of both retailers rallied Monday on the news.
Kluge said it had conversations with various suitors, and made their own inquiries, over the years, but Weston’s offer came at the “right time.”
“In the end, it just happened to be the right time when these two minds came together, and came together quickly, but we believe at the right price for our shareholders,” he said during a conference call Monday.
Under Loblaw’s proposed deal, which could take six to seven months to close, Shoppers will retain its brand name and operate as a separate division of Loblaw.
Loblaw products, such as their private label President’s Choice, will be available in Shoppers stores, while some of the pharmacy retailer’s products and services, such as Life brands, will be available in the grocery retailer’s stores.
Domenic Pilla, president and CEO of Shoppers Drug Mart, said the deal provides significant and immediate value for Shoppers shareholders, who will receive up to $6.7 billion of cash and 119.9 million Loblaw shares.
The deal comes amid increased competition in the sector, with the entry of U.S. discount retail giant Target and the expansion of Walmart across Canada. The pressure on the sector has already prompted consolidation — last month, Loblaw’s rival Sobeys Inc. agreed to buy Safeway Inc.’s Canadian stores for $5.8-billion.
Loblaw’s acquisition is “another reaction to the changing competitive environment in Canada,” said Kevin Grier, food industry expert and senior market analyst at George Morris Centre in Guelph, Ont.
“It’s about consolidation and getting stronger, and getting bigger in order to compete with those two giants.”
The Competition Bureau said Monday that it would review Loblaw’s proposed acquisition. Weston said he was confident the deal would not be an overlapping transaction.
“Neither one of them has a big share in two of the same categories,” said Bobby Hagedorn, equity analyst with Edward Jones.
If combined before last year, the joint company would have taken in revenues of excess of $42 billion and annual cash flow of $1 billion. The deal is expected to yield annual savings of $300 million by the third year, the companies said.
The combined retailer would have 2,348 stores and 1,797 pharmacies.
The link between Shoppers’ Optimum Loyalty points program along with Loblaw’s PC Financial services is “one of the growth platforms,” as well, said Pilla.
“That will give us additional customer insights and additional scale,” he said, though both companies did not go into detail about how the programs could be integrated.
If Shoppers investors opt for the maximum amount of Loblaw equity, they would own roughly 29 per cent of the combined company. Also, George Weston Ltd. will subscribe for 10.5 million additional shares of Loblaw — its main subsidiary — valued at $500 million. Weston will pay $47.55, the closing price for Loblaw shares on Friday.