Metro, Jean Coutu enter $4.5B deal to combine grocery, pharmacy chains

Grocery chain Metro Inc. has made a formal offer to take over Jean Coutu pharmacy group for $4.5 billion after exclusive negotiations between the two retailers.

Combined grocery-pharmacy group will have more than 1,300 stores — mostly in Quebec and Ontario

A Metro supermarket is seen Wednesday in Ste. Marthe-sur-le-Lac, Que. The grocery giant has announced it will be merging with pharmacy chain Jean Coutu Group. (Ryan Remiorz/Canadian Press)

Two of the biggest retail names in Quebec have joined forces in a $4.5-billion deal they say will make them a leader in food, pharmacy, health and beauty.

Grocery chain Metro Inc. has made a formal offer to take over Jean Coutu pharmacy group after exclusive negotiations between the two retailers.

Shareholders of Jean Coutu are being offered a combination of cash and shares worth about $24.50 per share. Three-quarters of the payout or $3.2 billion will be in cash and 25 per cent in Metro shares, making Jean Coutu shareholders 11 per cent owners of Metro.

Metro has more than 850 food and pharmacy stores in Quebec and Ontario, while Jean Coutu has 419 pharmacies in Quebec, Ontario and New Brunswick.

Together, including their franchise operations, they employ 86,000 people and are the largest private sector employer in Quebec, according to Metro chief executive officer Eric La Flèche.

Jean Coutu Group CEO François Coutu will continue to run the pharmacy group. (Graham Hughes/Canadian Press)

Jean Coutu will take over Metro's pharmacy operations over the next three years, but will continue to operate as a separate division, headed by François Coutu, son of the company founder.

In a conference call with analysts, La Flèche said the merger is an opportunity to capitalize on consumer trends focusing on health and wellness.

"Consumers of all ages are focused on health and what they eat," he said.

He forecasts $75 million in synergies between the two operations over the next three years, including shared warehousing, an expanded online presence and eventually cross-selling of products.

Grocery industry competition

The two companies have had an eye on consolidation in the retail sector, including Loblaw's purchase of Shoppers Drug Mart in 2013, as well as the arrival of new competitors, such as Amazon and Walmart.

"This was the best opportunity for Metro to gain scale in Canada," La Flèche said.

Metro operates grocery stores under several banners, including Metro, Metro Plus, Super C and Food Basics, as well as more than 250 drugstores under the Brunet, Metro Pharmacy and Drug Basics banners.

It has made several takeovers in the past 12 years, including A&P Canada and ethnic food retailer Marché Adonis as well as a share of Alimentation Couche-Tard

La Flèche said Metro saw Jean Coutu as an "iconic brand," known and trusted in Quebec, with state-of-the-art prescription technology, a plus with Canada's aging population.

"It's a unique asset and clearly worth the price we paid," he said.

$16B in annual revenues

The transaction requires regulatory approvals and support from two-thirds of the votes cast by Jean Coutu Group shareholders at a special meeting to be held in November.

The companies announced last week that they were in "exclusive discussions" toward a deal to create a grocery-pharmacy group with more than 1,300 stores — in Quebec, Ontario and New Brunswick.

The combined company will have about $16 billion in annual revenues and $500 million in free cash flow.

Metro shares fell 1.3 per cent to $42.35 by late afternoon. Jean Coutu shares rose 1.6 per cent to $24.69 a share.

With files from the Canadian Press