Canada: Metro-Jean Coutu merger talks: A deal investors had been waiting for since 2013

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The long-anticipated merger of two Quebec-based retail giants could be happening, after grocery chain Metro Inc. indicated it’s keen to buy pharmacy retailer Jean Coutu Group Inc. for $4.5 billion.

News that Canada’s third largest grocery retailer was in exclusive talks to acquire Quebec’s biggest pharmacy chain for $24.50 per share is a deal industry insiders and investors had been waiting for since Metro was outbid by Empire Co. for the Safeway chain in June 2013. Just weeks later, Loblaw announced its blockbuster $12.4 billion acquisition of Shoppers Drug Mart, and the market has wondered ever since how Metro would respond.


“For Metro, it was very expected,” said Sylvain Charlebois, dean of management at Dalhousie University in Halifax. “(Chief executive) Eric La Fleche is running a very good business right now and Jean Coutu will only elevate its brand across the region.” Metro has the lowest exposure to retail pharmacy of the big three Canadian grocers, operating about 260 outlets under banners such as Brunet and Drug Basics. And investors have been calling for a deal since early 2013, when Metro sold 48.2 per cent of its longstanding investment in convenience store operator Alimentation Couche-Tard.

Such a merger would also likely be viewed favourably within Quebec, analysts say, where mergers or takeovers by out-of-province or American business interests have been a political lightning rod over the years. The takeover of Rona Inc. by North Carolina-based Lowe’s Cos. finally happened in 2016 after an initial bid in 2012 was met with stiff opposition in the province. And many politicians lamented when restaurant chain Cara, operator of Swiss Chalet, bought out the French province’s beloved St. Hubert chicken chain last year.

Ninety per cent of Jean Coutu’s 419 drug stores are in Quebec, with the remainder in New Brunswick and Ontario. “You are looking at two companies who are both very heavily committed to Quebec, and they understand the market very well,” Charlebois said.

Until now, industry watchers viewed the Coutu family as the biggest impediment to such a deal materializing: the company’s dual-share voting structure gives the family a majority stake in the retailer’s voting rights.

Patriarch and chairman Jean Coutu, 90, and his son, current CEO Francois Coutu, had repeatedly said over the years that the company is not for sale. Nephew Jean-Michel Coutu, executive vice president of retail operations, was tapped as a likely successor to run the family business founded in 1969. But the Coutu family supports the proposed offer from Metro, the statement said Wednesday.

“From Jean Coutu’s standpoint this is disruptive, because they are such a family controlled company,” Charlebois said.

What changed? The retail environment has only grown more competitive since 2013, and Walmart and Costco have taken up an ever-growing share of the grocery and pharmacy markets, but those factors have persisted for years. The Amazon purchase of Whole Foods last month, however, might have made Metro a more ardent suitor.

In Jean Coutu’s case, the news comes two months after the Quebec government announced it would cut its generic drug budget by about 35 per cent, a move that stood to hurt Jean Coutu’s generic drug business, Pro Doc, and squeeze the retailer’s profits.

“It’s a win-win for the long term,” Alex Arifuzzaman, partner in Toronto-based retail real estate specialist InterStratics Consultants, said after the companies confirmed Metro issued a non-binding letter of intent on Aug. 22 for a proposal consisting of 75 per cent cash and 25 per cent Metro’s shares. The transaction remains subject to negotiating definitive agreements and would require regulatory approvals.

Much like Loblaw’s purchase of Shoppers Drug Mart, such a deal would give Metro access to Jean Coutu’s smaller footprint urban retail locations, Arifuzzaman said, and will allow the companies to cross-merchandise the strongest performing products between the stores.

Despite the high concentration of stores — Metro operates only in Ontario and Quebec — Arifuzzaman expects such a deal would be approved by Canada’s Competition Bureau.

“The Competition Bureau allowed the takeover of Shoppers Drug Mart by Loblaw. The Bureau will likely ask them to divest a location or two after they look at concentrations in individual markets, but there are a lot of drug stores operating in the market.”

The announcement, which represents a six per cent premium to Tuesday’s closing Jean Coutu share price, came after both shares were halted Wednesday morning.

Jean Coutu’s shares ended the day 6.3 per cent higher and Metro’s spiked close to 8.8 per cent.


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