Loblaw Companies Ltd. announced plans Monday morning to purchase Shoppers Drug Mart Corp. for $12.4 billion in cash and stock, in a move the companies’ top executives promised would change the Canadian retail landscape.
The deal would merge Canada's largest grocery and pharmacy chain under one umbrella.
Under the terms of the deal – which is still subject to approval -- Loblaw would gain around 1,200 Shoppers locations, and begin carrying some of drugstore’s products.
Shoppers will begin carrying Loblaw food products, but will retain its name, Loblaw executive chairman Galen Weston said.
“This is a transaction about two complementary businesses,” Weston said during a news conference Monday. “We are changing the retail landscape in Canada.”
Weston said the deal is about creating a Canadian “champion” specializing in health, wellness and nutrition.
“Loblaw combining with Shoppers Drug Mart is the ultimate expression of that objective,” he said, adding the merger will allow the company to offer customers more products.
Shoppers Drug Mart assured customers Monday that its popular Optimum points program will continue, despite the merge.
"Hi everyone, Canada's favourite loyalty program will continue. No plans to change #Optimum for our valued @shopprsdrugmart customers," read a statement posted to the chain's official Twitter account.
Shoppers says 10 million people are registered to collect Optimum points, which gives 10 points for every dollar spent.
Canadian retailers have faced increasing competition from large U.S. chains like Target, Walmart and Costco -- all of which sell a combination of groceries, electronics and pharmacy products.
“The grocery space is kind of under siege right now from a lot of other retailers," said Bobby Hagedorn, equity analyst at Edward Jones in St. Louis.
"We're seeing increased competition, but the growth really isn't there, and that kind of lends itself to an acquisition-friendly environment."
Some business leaders think that aside from the increase in size and scale for the promotion of private-label products, there is little in the deal that’s “revolutionary.”
"This deal hasn't made Loblaws more competitive in the grocery space, as far as I'm concerned, or at least not to the degree that's worth 12 billion bucks," said Gareth Watson, vice-president at Richardson GMP Ltd.
"I think the bottom line when it comes to this food industry is price, that's where the competition is coming from. I don't think this transaction really changes that competitive position whatsoever," Watson said.
Last month, competitor Sobeys picked up Safeway’s Canadian assets for $5.8 billion, in a deal that included 199 pharmacies.
Shoppers Drug Mart chair Holger Kluge said the merger will result in better customer service.
“Both Loblaw and Shoppers Drug Mart share a passion for our customers and together we will be able to serve them better than we could alone,” he said.
Shoppers president and CEO Domenic Pilla said he was confident the merger was a good “cultural fit.”
“We strongly believe that now is the time and this is the deal,” he said.
Earlier Monday, news of the merger dominated business headlines across the country.
"George Weston Ltd., which owns 63 per cent of Loblaw and is the majority shareholder, says it is going to raise $500 million through the sale of new shares in order to finance the cash portion of the deal," BNN's Michael Kane said.
Kane said many Shoppers locations sit on prime real estate and could potentially be folded into Choice Properties Real Estate Investment Trust -- a new entity which holds the land on which Loblaw stores are built.
Shoppers shares (TSX:SC) rose by 24 per cent, or $11.72, to close Monday at $60.12 as investors reacted positively on the Toronto Stock Exchange. Loblaws shares also saw a boost and were up by five per cent at $50.13 a share.
If the merger had been completed last year, the combined businesses would have totalled approximately $42 billion in revenue and $1 billion in free cash flow.
Together, the companies expect to gain $300 million in savings after three years, without closing any stores.
Pilla said the deal provides "significant and immediate value" for shareholders.
"For our Associate-owners and employees, who are a valued part of the equation, it provides the opportunity to pursue rewarding careers as we grow together. And for our customers, it provides more locations with an enhanced mix of products and offerings that contribute to the good health of Canadians," he said.
Loblaw is offering $33.18 in cash plus about six-tenths of a Loblaw common share for each Shoppers Drug Mart common share.
At least two-thirds of Shoppers Drug Mart shareholders and a majority of Loblaw shareholders must approve the deal.
With files from The Canadian Press
