Winnipeg Free Press

Winnipeg Free Press (Newspaper) - July 16, 2013, Winnipeg, Manitoba C M Y K PAGE B6 BUSINESS EDITOR: SHANE MINKIN 204- 697- 7308 business@ freepress. mb. ca I MARKET DETAILS B7 I winnipegfreepress. com TUESDAY, JULY 16, 2013 B 6 TORONTO - A $ 12.4- billion bid by Loblaw Companies Ltd. to buy pharmacy chain Shoppers Drug Mart Corp. was not pitched in a boardroom on Bay Street, but instead, during a countryside meeting in a minivan northwest of Toronto. The heads of the companies say the friendly deal was brokered because it was a good match, but more importantly, the timing was right. " I met with ( Shopper's chair) Holger ( Kluge) in a minivan on a country road on Thursday morning at 8 o'clock," Loblaw executive chairman Galen Weston said Monday. " That's when I proposed to him the transaction." But the two men said they've been in discussions over a potential sale for years. " We'd been dating for some time," Kluge said. Weston said he has been thinking about expanding his grocery empire into the health and wellness category for the past decade. Kluge said Loblaw was not the only contender for the drugstore chain, which has received solicited and unsolicited offers over the past few years. - The Canadian Press LOBLAW Companies Ltd.' s blockbuster offer to buy Shoppers Drug Mart Co. for $ 12.4- billion shows Canadian grocers are hungry for pharmacy companies. It's a match that makes sense, and investors certainly think so. Under the terms of the agreement, which is still subject to approvals, Shoppers will keep its brand name and operate as a separate division of Loblaw. Investors reacted positively on the Toronto Stock Exchange, with shares of Shoppers rising 24 per cent, or $ 11.72, to close at $ 60.12 while Loblaw shares were up $ 2.58 or more than five per cent at $ 50.13. The Loblaw- Shoppers deal is the biggest retail acquisition in Canadian history. It's also the culmination of a lot of jostling by Canadian grocers to move into and expand their pharmacy businesses. When former Canadian retail company Zellers went out of business last year, there was a scramble by companies to scoop up its prescription files. The companies that ended up buying those files were telling: Loblaw, Metro and The Overwaitea Food Group in B. C. It's simply a matter of demographics. An aging population means even though costly new drug rules in Canada might curb profits, pharmacies remain a lucrative business opportunity. Grocers and pharmacies make for a good pairing. As one analyst pointed out Monday, the synergies between the two businesses are strong, and there's evidence of that in the Shoppers and Loblaw deal. The grocery business requires massive distribution channels, which offer plenty of benefits to smaller scale pharmacies. Meanwhile, prescription drugs offer grocers higher margins to compensate for their fairly low- margin business. The Loblaw deal isn't the only big acquisition this year to highlight grocer- pharmacy convergence. When Sobeys' parent, Empire Co. Ltd., announced its surprise $ 5.8- billion over of Safeway Inc.' s Canadian division earlier this year, it also acquired Safeway's sizable pharmacy business along with it. Pharmacies are an appealing business because they bring back customers, compared with other retail segments, which struggle to keep customer loyalty in an age of fierce price competition. Zellers is a perfect example of that. While it lost large chunks of market share to competitors such as Walmart, its pharmacy segment remained its most profitable division until the end. - Financial Post Superstores in Manitoba . Winnipeg - 8 . One each in Brandon, Steinbach and Winkler. EXTRA FOODS ( Also owned by Loblaw) . Winnipeg - 4 . One each in The Pas, Swan River, Selkirk and Dauphin. SHOPPERS DRUG MART . Winnipeg - 30 . Brandon - 2 . One each in Portage la Prairie, Steinbach, Thompson, Winkler, Morden and Selkirk. Grocers target pharmacies By John Shmuel Offer higher profits in low- margin business Mega deal pitched ' in minivan on a country road' T ORONTO - Two of Canada's biggest retailers have struck an agreement to combine their operations, with Loblaw Companies Ltd. buying Shoppers Drug Mart Corp. for $ 12.4- billion in cash and stock. The acquisition will keep Shoppers' brand name in place and allow it to operate as a separate division of Loblaw, the companies said on Monday. But, it also raises questions about the next major deal in Canada's hotly pursued pharmacy retailer sector. Last month, fellow grocer Sobeys picked up the Canadian assets of grocer Safeway for $ 5.8 billion in a deal that included 199 in- store pharmacies. " With today's transformational partnership between Loblaw and Shoppers Drug Mart, we are changing the retail landscape in Canada," Galen Weston, executive chairman of Loblaw, said Monday. " I've long believed that becoming a Canadian health and wellness, and nutrition, champion represented the most powerful next chapter for Loblaw." Loblaw is offering $ 33.18 in cash plus about six- tenths of a Loblaw share for each Shoppers Drug Mart common share. The proposal was valued at $ 61.54 per Shoppers Drug Mart common share based on Loblaw's share price before it was announced, more than a 29 per cent premium on Shoppers' average trading price. About 54 per cent of the deal will be paid in cash while the rest will come in Loblaw shares. Canadian retailers have faced increasing competition from large U. S. chains over the past few years, with the expansion of Walmart and the recent entry of Target, both of which offer a variety of food options as well as merchandise and pharmacy items. " The grocery space is kind of under siege right now from a lot of other retailers," said Bobby Hagedorn, equity analyst at Edward Jones in St. Louis. " We're seeing increased competition, but the growth really isn't there, and that kind of lends itself to an acquisition- friendly environment." Weston and other executives of the two companies said they anticipate cross marketing of each company's products - mentioning the Loblaw President's Choice and Blue Menu brands and Shopper's Life brand - as well as services such as their loyalty points programs. Aside from an increased company size and scale for its private- label products, Gareth Watson, vice- president at Richardson GMP Ltd., said there seems to be little within the deal that's " revolutionary." " This deal hasn't made Loblaws more competitive in the grocery space, as far as I'm concerned, or at least not to the degree that's worth 12 billion bucks," he said. " I think the bottom line when it comes to this food industry is price, that's where the competition is coming from. I don't think this transaction really changes that competitive position whatsoever." The combined operations of Loblaw and Shoppers would be a massive revenue force. Last year, the two companies took in a combined $ 42 billion in sales and had $ 1 billion of free cash flow. Loblaw said it expects to produce $ 300 million in cost savings after three years, without store closures. The deal still requires approval from at least two- thirds of the votes cast 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. Holders of Shoppers stock have the option of receiving $ 61.54 cash or, alternatively, 1.2941 Loblaw common shares plus one cent cash, subject to caps on the total number of shares and total amount of cash. The amount of cash is capped at $ 6.7 billion and the number of shares is capped at 119.9 million. Assuming Shoppers investors opt for the maximum amount of Loblaw equity, they would own about 29 per cent of the combined company. In a related move, George Weston Ltd. 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. - The Canadian Press Loblaw's $ 12- billion drug deal By David Friend TORONTO - Shoppers Drug Mart worked to reassure shoppers Monday the purchase of the pharmacy retailer by Loblaws Companies Ltd. will not affect its popular Optimum loyalty program. " Hi everyone, Canada's favourite loyalty program will continue. No plans to change Optimum for our valued ( at) shopprsdrugmart customers," the chain's official Twitter account tweeted. Shoppers says 10 million people are registered to collect Optimum points, which rewards shoppers with 10 points for every dollar spent. In a call with investors, Loblaw executives said the company's PC Financial division, which oversees banking and credit card services, will undoubtedly " benefit" from Shoppers " incomparable" Optimum points program by being better able to target its products to customers. " It's really about adding significant customer insight and significant customer reach to a direction that we've already had, which is creating tailored, relevant offers to those individuals," Loblaw president Vicente Trius said. Ken Wong, a marketing and business strategy professor at Queen's University, said the price Loblaw paid for Shoppers may partly be due to the value of its Optimum program. " I do think that they are being very wise in keeping the two programs separate. There is no reason why you need to integrated the two under a single banner," he said. Purchase won't affect Optimum loyalty program . Acquires Shoppers Drug Mart . Shareholders have final approval Lo th I' bi wh du th fr ' We are changing the retail landscape in Canada' - Galen Weston Holger Kluge There are almost 40 Shoppers Drug Mart stores in Manitoba. MICHELLE SIU / THE CANADIAN PRESS Domenic Pilla ( left), president and CEO of Shoppers Drug Mart Corporation, and Galen G. Weston, executive chairman of Loblaw share a laugh at a Toronto press conference announcing Loblaw Companies Limited will acquire Shoppers Drug Mart Corporation for $ 12.4 billion in cash and stock. B_ 06_ Jul- 16- 13_ FP_ 01. indd B6 7/ 15/ 13 11: 44: 53 PM ;