Loblaw, Canada's largest supermarket chain, has agreed to buy Shoppers Drug Mart for $12.4 billion, the companies announced early Monday.
Toronto-based Loblaw will acquire all outstanding common shares in Shoppers, gaining some 1,200 drug stores in all provinces — many of them small locations in urban markets — in return for cash and Loblaw shares.
The deal “changes the retail landscape in Canada,” said Loblaw executive chairman Galen G. Weston in a statement. “With scale and capability, we will be able to accelerate our momentum and strengthen our position in the increasingly competitive marketplace."
Shoppers Drug Mart will keep its name and operate as a separate company while adding certain Loblaw products to its shelves.
The move comes as supermarkets face mounting competition from giant discount retailers such as Wal-Mart and Target, which also offer groceries — giving rise to consolidation.
The Sobeys grocery chain last month reached a deal to buy more than 200 Safeway stores in Western Canada for $5.8 billion, a deal it expects will save $200 million in costs annually within three years.
Loblaw says buying Shoppers will save $300 million in costs by the third year. Loblaw added that no stores will be closed.
Loblaw last week made a separate move into health-product retailing with Nutshell Live Life Well — a pilot store in Toronto aimed at upmarket, health-conscious consumers.
Using the Friday closing price, the offer is worth $61.54 per Shoppers Drug Mart common share. That's about 29 per cent above the recent average trading price for the Shoppers stock.
The agreed price consists of about 53.9 per cent cash and 46.1 per cent Loblaw common shares, the companies said. Shoppers shareholders can choose whether to get $61.54 in cash or 1.29417 Loblaw common shares plus $0.01 cash for each Shoppers Drug Mart share held.
The amount of cash to be paid by Loblaw will be capped at $6.7 billion and the maximum number of Loblaw common shares to be issued will be about 119.9 million, the release said.
The takeover is the largest in Canada since last summer’s Nexen deal, and is subject to regulatory and shareholder approval.
Shoppers shareholders will see “significant and immediate value,” chief executive Domenic Pilla said in a statement.
Loblaw is paying about 10.29 times earnings before interest, taxes, depreciation and amortization, Bloomberg News reported, compared with a median of more 6.15 times Ebitda on similar deals.