Another Canadian grocery store and pharmacy chain conglomerate could be on the horizon as Metro Inc. and Jean Coutu Group are "engaged in exclusive discussions" about a roughly $4.5-billion merger.
The potential deal is "a great opportunity" for Metro, which would expand its presence and potentially lower prices at a time when the country's grocers are competing on both scale and price, said Richard Powers, an assistant professor at the University of Toronto's Rotman School of Management.
Metro announced Wednesday morning that the two companies are in discussions for the Montreal-based grocer to acquire the Quebec-based pharmaceutical chain. The proposed acquisition would cost Metro $24.50 per share, which would be paid 75 per cent in cash and the remainder in shares.
This price was established in "the course of negotiations" between the two firms ahead of a non-binding letter of intent dated Aug. 22, Metro said in a statement, adding the Coutu family has indicated it intends to support the proposal.
While the acquisition price tag "appears steep," wrote RBC Dominion Securities Inc. analyst Irene Nattel in a note, the potential combination of the two "would be accretive to shareholders."
Size matters, said Powers, and the proposed merger would boost Metro's store count by several hundred.
Jean Coutu operates more than 400 stores in Quebec, Ontario and New Brunswick. Metro has more than 600 food stores in Quebec and Ontario, as well as more than 250 drug stores and pharmacies, according to its website.
The potential merger follows a pattern of acquisitions by other Canadian grocers to achieve greater scale, he said.
In 2013, the parent company of Sobeys, Empire Company Ltd., acquired the Safeway grocery chain in a $5.8-billion deal. The following year, grocery giant Loblaw Companies Ltd. (TSX:L) completed a $12.4-billion acquisition of Shoppers Drug Mart.
More recently, technology giant Amazon announced a deal valued at US$13.7 billion to buy Whole Foods Market, which has 13 locations in Canada.
While Empire has struggled with its Safeway takeover, the company recently showed signs of a turnaround, posting its first positive same-store sales in six quarters.
The acquisition will benefit Empire in the end, said Powers, as it gives the company a national presence.
The acquisition of Shoppers has boosted Loblaw's bottom line, and CEO Galen G. Weston has noted the company's seen success selling food items at the drug store.
Powers expects a similar strategy from Metro, where it will focus on making the pharmacies a convenient one-stop shopping location.
If the deal materializes, consumers are likely to benefit, said Quebec Finance Minister Carlos Leitao, as larger players can procure products at lower prices.
"For consumers, it's good news because they'll be able to get products at a lower price," he said, stopped on his way into a cabinet meeting.
The minister added that he would let the two companies negotiate.
Analysts have been anticipating a partnership between the two companies for some time, with the Loblaw-Shoppers merger leading to increased speculation.
Prior to that, when Metro made a surprise announcement in January 2013 that it was selling 48.2 per cent of its 25-year investment in convenience store operator Alimentation Couche-Tard, industry observers speculated that the grocer was eyeing an acquisition or looking to reward its shareholders. Analysts at the time suggested Jean Coutu could be a contender.
Both companies' shares advanced Wednesday as investors reacted positively.
Metro (TSX:MRU) shares rose nearly nine per cent or $3.52 to $43.61 in the day's trading, while Jean Coutu (TSX:PJC.A) advanced more than six per cent or $1.45 to $24.54.
Both companies will not provide further comment, Metro said, but will inform stakeholders and the public of significant developments regarding the proposed merger.
The deal would be subject to regulatory approvals and other conditions, Metro said.