Canadian drug store chain Rexall is set to be bought by U.S. health-services company McKesson Corp. in a $3 billion deal.
The Edmonton-based chain of 470 pharmacies announced the deal, in a release on Wednesday, that will see the company move to the hands of San Francisco-based McKesson, but keep operating under the names Rexall and Pharmaplus in Canada.
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The deal is expected to close in the first half of 2016, but will require numerous levels of regulatory and shareholder approval including the Competition Bureau and Industry Canada, which governs foreign takeovers under the Investment Canada Act since it is one that could potentially lessen competition in Canada.
The initial reaction from McKesson shareholders was a positive one, as the stock gained about two per cent to trade at $159.78 on the NYSE.
While far from a household name, McKesson has more than a century of history in Canada behind the scenes, providing medicine, health-care supplies and information technology to other companies in the health-care arena. In a release, the two companies said Rexall and McKesson have already been working together for 20 years.
It's not even the first time the two companies have struck a deal for pharmacies. In 2012, the Katz Group, founded by Edmontonian Daryl Katz who currently controls the Rexall chain, sold 850 pharmacies that operate under IDA, Guardian Drugs and The Medicine Shoppe to another arm of McKesson's health-care conglomerate.
Wednesday's deal also comes in reaction to a 2013 move by rival Shoppers Drug Mart to join forces with grocery chain Loblaws to create the largest pharmacy chain in the country, with more than 1,300 locations from coast to coast to coast.
Doug Stephens, founder of Retail Prophet, said the deal makes "perfect sense" because it will allow Rexall to expand into food and health services to compete with Shoppers.
McKesson will "give them the strength that they need to compete with the Shoppers Drug Marts of the world," he said in an interview on CBC's The Exchange.
The U.S. chain also will lend Rexall "buying power, give it the infrastructure it needs to compete and help with that evolution toward a place where consumers go to be well, instead of just the old-time pharmacy where people go when they're sick. That is an important evolution for Rexall to make," Stephens said.
Retail analyst Bruce Winder said the low loonie likely helped the deal come to fruition.
"Canadian companies are going for a lot cheaper than they were even two years ago, which means that they have a greater chance in the return on investment by paying such a lower acquisition cost for the entity," said Winder, a partner and founder of Retail Advisors Network.
"With the U.S. economy surely but slowly picking up, and the Canadian dollar being as weak as it is, everything is on sale in Canada."
McKesson also probably sees value in Rexall's already established retail outlets, Winder said. In recent years, the drugstore chain has built bigger and brighter stores and introduced more grocery and private product label lines as it faces stiffer competition in the growing pharmacy market.
"They sort of showcased what they can do if given the right capital with some of their newer outlets," he said.
Katz to focus on sports, entertainment
Katz says the proceeds from the sale of the chain will be used to strengthen his other businesses: real estate, sports and entertainment, and private and public investments.
Among other things, Katz is the controlling shareholder of the Edmonton Oilers hockey team and two minor league affiliates: the WHL's Edmonton Oil Kings and the AHL's Bakersfield Condors. Katz Group is currently in the process of spearheading a new arena complex in the city and has already invested $2.5 billion into the endeavour, according to a spokesman for the company.
He also recently got into the movie business alongside Hollywood producer Joel Silver to fund Silver Pictures Entertainment.