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Report On Business Metro seals deal for Jean Coutu to form Quebec powerhouse

A Metro supermarket is seen Wednesday, September 27, 2017 in Ste. Marthe-sur-le-Lac, Que.

Ryan Remiorz/THE CANADIAN PRESS

It took nearly half a century for Jean Coutu to build a pharmacy retail empire that enjoys unparalleled brand trust with consumers and the industry's highest sales per square foot in North America. It took a single mandate for the Quebec government to hatch the drug reforms that helped convince him to sell the company.

Mr. Coutu, 90, has struck a friendly $4.5-billion deal to sell his iconic pharmacy business to grocer Metro Inc. It's a bet that the two companies are better off together than apart amid growing threats from Amazon's e-commerce expansion and other shifting sands in the retailing sector. It came, sources said, after the Coutu family concluded that the path to growth was limited within Quebec because of the province's drug reforms and improved outside Quebec with a partner.

The agreement, announced Monday morning after discussions were revealed last week, would see Jean Coutu shareholders get $24.50 a share, 75 per cent in cash and 25 per cent in Metro stock. The price represents a premium of 15.4 per cent over the average price of Jean Coutu's class A subordinated voting shares for a period ending Aug. 21, 2017, the day before the two companies signed a non-binding letter of intent regarding an acquisition.

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The sale caps the career of one of Canada's most legendary entrepreneurs and increases Mr. Coutu's own net worth. With a 93 per cent voting stake in the company that bears his name, Mr. Coutu will personally pocket more than $2.5-billion in cash and Metro stock if the deal is finalized and become a major Metro shareholder with a 6 per cent stake. His son, François Coutu, will lead Metro's pharmacy business, which will be a standalone division.

"Sometimes you have to forget your ego" and think bigger picture, Mr. Coutu told reporters at a Montreal news conference when asked why he was selling. "[This] decision is something we have to do to improve the situation."

After an abortive push to expand into the United States in the early 2000s, Jean Coutu retreated to its Quebec base, focusing instead on growing its Pro Doc generic drug manufacturing business and serving existing customers. When Loblaw Cos. Ltd. announced in 2013 that it would take over Shoppers Drug Mart Corp., bankers began pitching Jean Coutu on a tie-up with Metro. But Coutu continued to insist it did not feel any pressure to do a deal.

Until now. Changes brought forward by Quebec Premier Philippe Couillard's government since its 2014 election, including a plan to limit the share of drugs sold by Pro Doc in Jean Coutu stores to 50 per cent from the current 75 per cent level, provided the spark for Coutu to sell, according to a source familiar with the transaction.

The provincial government was seen as undermining Coutu's potential to expand in Quebec, while outside the province expansion was seen as difficult because the market is dominated by Shoppers and local chains, said the source, who spoke on condition he not be identified. "They're lucid enough to see that the future was not as bright as the past," the person said. Metro made an offer they could not refuse, he said.

Both Jean Coutu and company chief executive officer François Coutu spoke out against the Quebec government in January for ignoring the company's proposals about drug reforms, hinting that the government's actions could force them to sell the chain. On Monday, however, they down played the impact of the government's moves in their decision to hand the keys to Metro. The companies began exclusive talks earlier this year that led to Monday's agreement, company executives said.

"This is the deal we wanted to make," said François Coutu, who will lead Metro's drugstore arm. He said it was important that the Coutu family were able to participate in the new venture.

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The combination gives the companies more heft, increased operational efficiencies and a more diverse revenue stream to meet the evolving competitive landscape, executives with the chains said. Quebec's Finance Minister last week backed the tie-up on the grounds that it would create a provincial champion with better purchasing power.

The combined business increases the size of Metro's network to more than 1,300 Canadian stores, capable of generating $16-billion in revenue; more than $1.3-billion in earnings before interest, tax, depreciation and amortization; $500-million in free cash flow; and $75-million in "expected synergies" within three years of the transaction. It would have nearly 87,000 direct and indirect employees, many of whom would be in Quebec, where it would become one of the province's largest private-sector employers.

"Size does matter in our industry," Eric La Flèche, Metro's chief executive, said.

The grocery and pharmacy sectors have faced a rash of consolidations in recent years as competition heats up. In addition to the Loblaw-Shoppers marriage, Sobeys Inc. acquired fellow grocer Safeway in Western Canada for $5.8-billion. In March 2016, U.S. health care company McKesson Corp. announced it would acquire the Rexall pharmacy chain for $3-billion. And looming over the broader sector is Amazon.com Inc.'s $13.7-billion (U.S.) purchase of Whole Foods Market Inc. this summer, leaving lingering fears over how e-commerce might shake up the industry worldwide.

There are cross-selling opportunities between Metro and Jean Coutu, including bringing more food into Jean Coutu pharmacies and more health and beauty products into Metro groceries, executives said. Both brands will continue to exist, as will Metro's existing Brunet pharmacies.

Metro has committed bank financing in place for the $3.4-billion (Canadian) cash portion of the takeover and said it also plans to sell assets to reduce leverage and maintain its current credit rating. Its biggest asset is the 32.2 million shares it owns in convenience store chain Alimentation Couche-Tard Inc., worth about $1.84-billion at current prices.

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"We're not under pressure" to unload the Couche-Tard shares, Metro chief financial officer François Thibault said. "We will do this in an orderly fashion to make sure we maximize proceeds."

Editor’s note: An earlier version of this article did not state the year of the McKesson Corp., Rexall merger announcement. This version has been fixed.
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