Loblaw acquires pharmacy chain for $12bn


Financier Worldwide Magazine

September 2013 Issue

September 2013 Issue

Canada’s biggest retailer, Loblaw Companies Limited, announced in mid-July that it had entered into a definitive agreement to acquire pharmacy chain Shoppers Drug Market Corporation, for $11.9bn. 

According to a joint statement released by the two companies,Loblaw offered Shoppers shareholders C$33.18in cash plus 0.5965Loblawcommon shares for eachShoppers common share held. Utilising theLoblawclosing common share price on12 July, the offer amounts to C$61.54 per share in cash and stocks. The offered price represents a 27 percent premium on Shopper’s 12 July closing price on the Toronto Stock Exchange. The total consideration of the deal will consist of around 53.9 percent cash and 46.1 percentLoblawcommon shares. 

The purchase of Shoppers, once completed, will represent the biggest Canadian M&A deal in 2013 to date. At the time of writing the deal is still subject to shareholder approval.“This transformational partnership changes the retail landscape inCanada. With scale and capability, we will be able to accelerate our momentum and strengthen our position in the increasingly competitive marketplace,” saidGalen Weston, executive chairman of Loblaw. 

Loblaw has noted that around C$5.7bn or 46 percent of the cost of the deal will be financed by the issue of new Loblaw shares. George Weston Ltd, Loblaw’s biggest shareholder will purchase an additional C$500m in Loblaw shares to help finance the deal, but in the process the company will dilute its stake in Loblaw from around 63 percent to 46 percent. The remaining C$6.7bn cash element of the deal will be financed with around C$4bn in debt financing and about C$2bn of Loblaw and Shoppers cash on hand. The debt financing will take the form of committed bank facilities fully underwritten byMerrill Lynch, Pierce, Fenner & Smith Incand Bank of America. These facilities consist of aC$3.5bnterm loan and aC$1.6bnbridge loan. 

The agreed price values Shoppers at 11.4 times its earnings before interest, tax, depreciation and amortisation (EBITDA). The combined group would have had EBITDA of C$3bn in 2012 and annual free cash flow ofC$1bn. 

Under the terms of the deal Shoppers will continue to operate as a separate division of Loblaw, and will retain its name and brand. Shoppers’ shareholders will own around 29 percent of the new combined company. The combined group will have 2348 stores and annual revenue of an estimated C$42bn. Both sides anticipate that the deal will be completed towards the end of the year, with the combined business expected to yield annual cost savings of around C$300m by the third year.These synergies are not dependent on any store closures, the companies said. 

Although Canada’s Competition Bureau has said that it will review the proposal, both sides expect the deal to be approved without having to divest any stores. 

The purchase of Shoppers, Canada’s biggest pharmacy chain, comes at a time when Loblaw is attempting to hold off increasing competition from US giants Wal-Mart Stores Inc and Target Corp, as well as consolidation from other Canadian retailers. Target has announced plans to open 124 new stores across Canada in 2013, a number it expects to expand to around 200 by 2020. Wal-Mart, which has been in Canada since the 1990s, has also declared its intention to expand its presence in the country. Starting this year, the group will add 37 new stores to its 379 existing Canadian locations, while increasing its fresh grocery offerings in its stores. In June, Canadian retailer Empire Co Ltd announced it was acquiring the Canadian assets of Safeway Inc for C$5.7bn.

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Richard Summerfield

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