Loblaws Purchases Shoppers Drug Mart

BDC Business Financing

TORONTO – Business – Loblaws is acquiring Shoppers Drug Mart. “This transformational partnership changes the retail landscape in Canada. With scale and capability, we will be able to accelerate our momentum and strengthen our position in the increasingly competitive marketplace,” said Galen G. Weston, Executive Chairman of Loblaw.  “This combination creates a compelling new blueprint for the future, positioning us to capitalize on important trends in society, from the emphasis on health, wellness and nutrition, to the imperatives of value and convenience.” It is a $12 billion blockbuster deal. 

A Shoppers Drug Mart store on Dupont Street in...
A Shoppers Drug Mart store (Photo credit: Wikipedia)

Loblaw Companies Limited, and Shoppers Drug Mart Corporation, have announced a definitive agreement under which Loblaw will acquire all of the outstanding Shoppers Drug Mart common shares for $33.18 in cash plus 0.5965 Loblaw common shares per each Shoppers Drug Mart common share, on a fully pro rated basis. Using the Loblaw closing common share price on July 12, 2013, this amounts to $61.54 per Shoppers Drug Mart common share. This price represents a 29.4% premium to the 20-day VWAP of Shoppers Drug Mart common shares as of July 12, 2013.

Loblaws Purchase of Shoppers Drug Mart – Market Changer

This strategic union will enhance the companies’ competitive positioning in an evolving retail landscape, creating new growth opportunities for shareholders, more and better choices for customers, and greater convenience through Shoppers Drug Mart’s footprint in the important and growing small-urban store sector.

Creating Compelling New Blueprint for Serving Canadian Customers

“Our customer proposition is at the heart of this combination,” said Vicente Trius, President of Loblaw.  “Together, we will be able to significantly enhance the customer experience by offering even greater assortments, service, value and convenience while preserving the unique shopping experiences that make both companies leaders in their respective segments. We are extremely happy to welcome Shoppers Drug Mart and its talented people, including their entrepreneurial and trusted Associate-owners, who are well-known for their patient care and friendly customer service.  We intend to preserve the great strengths of what the company has built by keeping Shoppers Drug Mart as a separate division of Loblaw, with its own dedicated management team led by Domenic Pilla.

“This acquisition also will allow us to accelerate our success in driving growth and profitability at Loblaw organically. Our customer proposition continues to deliver results, and I am enthusiastic about the prospect of value creation opportunities on multiple fronts,” Mr. Trius concluded.

Domenic Pilla, President and Chief Executive Officer of Shoppers Drug Mart, said: “We are delighted to partner with Loblaw to leverage our combined strengths.  For our shareholders, this transaction provides significant and immediate value, as well as the ability to benefit from future upside by virtue of their continued ownership of shares in the combined company.  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.”

Financial Highlights

On a pro forma basis, the combined company generated in excess of $42 billion in revenue, $3 billion in EBITDA*, and $1 billion in free cash flow* in 2012. The transaction is expected to lead to double-digit accretion, adjusted for intangible amortization, in Loblaw earnings per share in the first year.

The combination is expected to yield annual cost synergies of $300 million by year three, phased in evenly over the first three years following closing. These synergies are not dependent on any store closings.

The total consideration will consist of approximately 53.9% cash and 46.1% Loblaw common shares. Shoppers Drug Mart shareholders will have the ability to choose whether to receive $61.54 in cash or 1.29417 Loblaw common shares plus $0.01 cash for each Shoppers Drug Mart share held, subject to pro ration. The maximum amount of cash to be paid by Loblaw will be approximately $6.7 billion and the maximum number of Loblaw common shares to be issued will be approximately 119.9 million, based on the fully diluted number of Shoppers Drug Mart shares outstanding.

Shoppers Drug Mart shareholders, who will own approximately 29% of the combined company, stand to benefit from substantial upside over the long-term, driven by the combined company’s strategic position and achievement of full run-rate synergies.

Loblaw has structured the financing with the intent of maintaining its current BBB-mid credit rating. Loblaw will finance the cash element of the transaction with available cash resources and committed bank facilities fully underwritten by Merrill Lynch, Pierce, Fenner & Smith Inc., Bank of America, N.A., Canada Branch and Bank of America, N.A. These committed facilities consist of a $3.5 billion term loan and a $1.6 billion bridge loan that Loblaw plans to replace primarily through issuance of unsecured notes. The combined company’s significant cash flow will allow for rapid debt repayment and will ensure that Loblaw will have ample liquidity and maximum flexibility to support ongoing growth prospects, acquisitions and investments.

George Weston Limited, Loblaw’s controlling shareholder, has entered into a voting agreement in support of the transaction. To finance a portion of the cash consideration, Weston has agreed to subscribe for $500 million of additional Loblaw common shares at a price of $47.55 per share, Loblaw’s closing share price on July 12, 2013. After giving effect to this investment, Weston’s voting ownership will be approximately 46% of Loblaw’s common shares upon completion of the transaction.

Approvals and Closing Conditions

The transaction will be carried out by way of a court-approved plan of arrangement and will require the approval of at least 66 2/3% of the votes cast by the shareholders of Shoppers Drug Mart at a special meeting expected to take place in September 2013. Under applicable TSX rules, the transaction also requires the approval of Loblaw shareholders by majority vote, as the number of Loblaw common shares to be issued in the transaction exceeds 25% of the total number of outstanding Loblaw common shares. As Weston holds approximately 63% of Loblaw’s common shares, Loblaw expects that the TSX will accept Weston’s agreement to support the transaction as evidence of shareholder approval and not require Loblaw to hold a shareholder meeting. In addition to shareholder and court approvals, the transaction is subject to compliance with the Competition Act and certain other closing conditions customary in transactions of this nature. Loblaw and Shoppers Drug Mart anticipate that the transaction will be completed within six to seven months.

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