Quebec retail brands Metro, Jean Coutu merging to better face competition

MONTREAL _ Two of Quebec’s iconic retail brands are merging to better face industry competition with Metro Inc.’s $4.5-billion takeover offer for the Jean Coutu pharmacy group.

Shareholders of Jean Coutu (TSX:PJC.A) are being offered a combination of cash and stock worth about $24.50 per share.

Uniting two highly-respected brands represents an exciting milestone for the company, said Jean Coutu, the founder of the company that bears his name.

“Sometimes you have to forget your ego and try to combine with a real friend,” he said at a news conference on Monday.

Coutu, 90, insisted he’s not emotional about the decision to sell and hang up his white pharmacist’s coat following a period of deep reflection for the family that has run it since 1969.

“I think the move we are doing actually is good for both of these companies, it’s good for myself and it’s good for the future because we open up more opportunities than staying what we were.”

After exiting the U.S. market in 2013 with the sale of its stake in the Rite-Aid pharmacy chain, Jean Coutu Group has had limited opportunities for growth.

Meanwhile, the food and pharmacy industries have faced intensifying competition from other food retailers, Wal-Mart, Costco and Amazon’s entry in the grocery space with its purchase of Whole Foods.

The merger follows Loblaw Companies Ltd.’s (TSX:L) $12.4-billion cash-and-stock deal in 2014 of Shoppers Drug Mart, which operates as Pharmaprix in Quebec.

Metro CEO Eric La Fleche said the combination is a unique opportunity for two of Quebec’s best known companies to join forces to propel growth against retail giants.

“We need this size to have economies of scale and efficiency to fight with the large players that we currently face,” he said.

In addition to increasing food available in pharmacies and health products in Metro stores, La Fleche said the combined company will be better able to extend its reach and possibly grow in “other geographies.”

“Perhaps down the road there could be an opportunity to broaden the pharmacy network in Ontario or elsewhere in Canada,” Le Fleche said.

Quebec’s second-largest pharmacy network, including Jean Coutu and Brunet, will operate as a separate division of the grocery company, headed by Francois Coutu, son of the company founder.

He said the company conducted exclusive negotiations with Metro after it came to the conclusion that the combination would help its chain to grow.

“We came to the conclusion that Metro was the ideal partner,” Coutu told reporters.

He said disagreement with Health Minister Gaetan Barrette’s efforts to reduce drug costs didn’t influence its decision to sell.

Jean Coutu shareholders would own 11 per cent of Metro (including five per cent by the Coutu family) and the pharmacy chain will appoint two board members.

The combined company will have nearly 87,000 workers at more than 1,300 stores _ in Quebec, Ontario and New Brunswick _ and about $16 billion in annual revenues.

It is aiming for $75 million in cost savings within three years. Some of that will come from the closure of two pharmacy distribution centres that will affect a few hundred people. The work will be moved to Jean Coutu’s large new building and headquarters in Varennes, southwest of Montreal.

The transaction requires regulatory approvals and support from two-thirds of the votes cast by Jean Coutu Group shareholders at a special meeting to be held in November. The deal is expected to close next spring.

The Coutu family and affiliated entities which hold 93 per cent of voting rights, along with company directors and senior officers, have agreed to vote in favour of the deal.

Metro said it plans to sell some or all of its 32.3 million shares in convenience store operator Alimentation Couche-Tard (TSX:ATD.B) over time to reduce its debt.