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Loblaw to buy Shoppers Drug Mart for $12.4 billion

TORONTO (NEWS1130) – Loblaw Companies Ltd. (TSX:L) has announced a deal to take over Shoppers Drug Mart Corp. (TSX:SC) for $12.4 billion in cash and stock, combining Canada’s largest grocery and pharmacy chains.

Under the terms of the agreement, Shoppers will keep its brand name and operate as a separate division of Loblaw.

“I have long believed that the next chapter for growth at Loblaw should be based in a vision that combined health, wellness and nutrition. Loblaw combining with Shoppers Drug Mart is the ultimate expression of that vision,”  says Galen Weston, executive chairman of Loblaw.

“Not only does this transaction make compelling financial sense, it establishes a truly innovative platform for the future,” says Weston.

Loblaw is offering $33.18 in cash, plus about six-tenths of a Loblaw share for each Shoppers Drug Mart common share.

Using the Friday closing price, the offer is worth $61.54 per Shoppers Drug Mart common share — about 29 per cent above the recent average trading price for the Shoppers stock — with about 54 per cent of the price paid in cash.

Shoppers shares were up $12.70 or about 26 per cent at $61.10, while Loblaw shares were up $3.45 or about seven per cent at $51 on the Toronto Stock Exchange in early trading.

Weston and other executives of the two companies said they anticipate cross marketing of each company’s products, specifically mentioning the Loblaw President Choice and Blue Menu brands and Shopper’s Life brands, as well as services such as their loyalty points programs.

If the combination had been completed last year, the business would have had about $42 billion of revenue and $1 billion of free cash flow. The companies expect to produce $300 million in cost savings after three years, without store closures.

Canadian retailers have faced increasing competition from large US chains, such as Target, which began to roll out its stores across the country earlier this year. It joins Walmart and Costco and as well as domestic retailers such as Sobeys that offer a combination of merchandise, pharmacy products and groceries.

The deal will require approval by at least two-thirds of the votes case by Shoppers Drug Mart shareholders at a special meeting expected to take place in September.

A majority of Loblaw shareholders must also approve the deal because of the number of shares being issued.

Domenic Pilla, president and CEO of Shoppers Drug Mart, said the deal provides “significant and immediate value” for Shoppers shareholders who will receive up to $6.7 billion of cash and 119.9 million Loblaw shares.

“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.”

Pilla and Loblaw executives have told analysts that they don’t anticipate any store closings as a result of this transaction and they endorsed the current use of associate owners at Shoppers Drug Mart.

“We really value the contribution that (the associate owners) make and the creativity, entrepreneurship that they bring and they stewardship they bring to our store level. So we’re not anticipating making any changes there,” Pilla told analysts.

Weston adds: “We operate a very powerful franchise business that is similar in many respects to the associate model that Shoppers Drug Mart operates and we believe wholeheartedly in its effectiveness, so we think we understand it well.”

In a related move, George Weston Ltd. (TSX:WN) will subscribe for 10.5 million additional shares of Loblaw — its main subsidiary — valued at $500 million. Weston will pay $47.55, the closing price for Loblaw shares on Friday.

Proceeds from the offering will be used to pay a portion of the Shoppers purchase. George Weston will control about 46 per cent of the Loblaw voting rights after the acquisition.