(Bloomberg)—Canadian grocer Metro Inc. pledged to sell some assets to reduce its financing needs and retain its credit rating as part of a C$4.5 billion ($3.6 billion) purchase of pharmacy chain Jean Coutu Group Inc.
Metro will pay C$24.50 a share in cash and stock for Jean Coutu, about a 6.1% premium to Jean Coutu’s price before the two companies announced last week that they were in advanced talks. The grocer said it has access to C$3.4 billion in bank credit lines to finance the purchase.
The deal links two giants from Quebec and gives Montreal-based Metro an expanded foothold in the drug business, helping it diversify in an industry under increasing threat from Amazon.com Inc.’s food expansion. Jean Coutu’s earnings have been under pressure because of new provincial regulations on generic drugs, though a compromise was recently found with the government.
Metro also has the option to sell its 32.2 million shares in Alimentation Couche-Tard Inc., the owner of the Circle K convenience-store chain, to help finance the deal, analysts have said. Metro has gained 6.9% this year through Friday’s close.
“Bringing together our two highly respected and long-standing Quebec brands represents an exciting milestone,” chairman Jean Coutu said in the statement Monday. Metro said it expects the deal to boost earnings per share.
Jean Coutu shares closed last week at C$24.30 after the companies confirmed they were in talks. Metro closed at C$42.91.
Cash and stock
Metro said the purchase includes a 75% cash component, with 25% in stock. The offer works out to C$18.38 in cash and 0.15251 Metro share, according to the statement. Metro said it will sell assets and seek more permanent financing to maintain a “strong and flexible balance sheet” and keep its BBB credit rating.
The combined company will operate more than 1,300 stores in Canada, with pharmacy operations combined into a stand-alone division. Metro said it expects synergies of C$75 million within three years.
Canadian grocers, which were locked in a price war and are just coming out of a prolonged bout of food deflation, now have to get ready for Amazon, which in June agreed to buy Whole Foods Market Inc. Amazon is No. 1 in the Internet Retailer 2017 Top 500. The U.S. behemoth is also reported to have plans to roll out its Prime Now delivery service for groceries and other items in Canada this year.
The deal requires two-thirds support from Jean Coutu shareholders and already has the backing of the Coutu family who controls the drugstore chain.
Bank of Montreal and Canadian Imperial Bank of Commerce advised Metro on the deal, while National Bank of Canada worked with Jean Coutu.
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