Loblaws purchase of Shoppers OKed if it sells some stores

The Loblaws flagship location on Carlton Street in Toronto on Thursday May 2, 2013. (Aaron Vincent Elkaim / THE CANADIAN PRESS)

TORONTO -- Loblaw Companies Ltd. has received approval from the Competition Bureau for its $12.4-billion purchase of Shoppers Drug Mart, with a few stipulations.

The federal agency is requiring Loblaw to sell a total of 18 stores and nine Loblaw-run pharmacies to an independent operator.

Most of the stores listed for sale are in smaller communities and include 14 Shoppers locations and four under Loblaw banners.

Other "behavioural restrictions" will be placed on Loblaw over agreements with suppliers for up to five years, the Competition Bureau said.

The decision follows a review which began after the deal was announced last July.

The regulator examined hundreds of regions across the country where both Loblaw (TSX:L) and Shoppers operated stores, and concentrated on a number of local markets where competition was the greatest.

One area of focus was on overlapping products and services offered by both companies, which included prescription fees.

The review also identified agreements between Loblaw and suppliers that raised competition concerns, including one which required suppliers to compensate Loblaw for a predetermined profit margin, it said.

"The Bureau determined that without restrictions on certain Loblaw programs and agreements, the proposed transaction would likely lead to higher wholesale prices paid by other retailers to suppliers and, in some circumstances, higher retail prices for consumers," the report said.

One of the agreements that Loblaw reached with the agency prohibits the retailer from signing agreements that use sales volume at Shoppers as extra weight for its existing profit margin agreements. It also prevents the company from entering into new agreements of this type for its Shoppers stores.

Loblaw agreed to exclude sales from Shoppers from a program where it seeks compensation from suppliers when a competitor advertises a sale price in its flyers that's lower than a Loblaw flyer in the same time period.

The Competition Bureau says it will continue to investigate certain pricing programs and agreements Loblaw has made.

Loblaw, which has Canada's largest network of grocery stores operating under several banners, says it will "co-operate with the Competition Bureau in its continued review of these practices."

"Loblaw is committed to supplier practices that meet the Bureau's objectives of maintaining competitive markets," the company said in its announcement Friday.

All of the agreements between the regulator and Loblaw will expire five years after the transaction's closing date on March 28.

"This agreement addresses the most significant negative competitive effects of the merger by ensuring that consumers continue to benefit from competitive prices in the retail sale of drugstore and pharmacy products in Canada," said John Pecman, the commissioner of competition in a statement.

Some suppliers have complained that the country's largest grocery chains use unfair practices, and have called on an industry code of conduct.

Price negotiations with suppliers has become a priority for national retailers. The entry of Target and a more aggressive rollout of Walmart supercentres in recent years spurred a consolidation of big Canadian stores last year.

Sobey's bought the Canadian assets of U.S. grocer Safeway for $5.8 billion, a deal that expanded its reach in Western Canada. The Competition Bureau required the company sell 23 stores to win approval.