Why Metro’s ‘inevitable’ purchase of Jean Coutu took years to happen

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Grocery confine Metro is in exclusive discussions to take over pharmacy chain Jean Coutu, a corporate wedding that seemed destined to some experts years ago but the timing in no way quite worked until now.

On Wednesday, the Quebec-based chain said it was proposing to buy Jean Coutu for $24.50 a share in a practise that would add Jean Coutu’s more than 400 shops in Quebec, Ontario and New Brunswick to Metro’s stable of 600 food believe ins in Quebec and Ontario, and 250 pharmacies.

While some have contend persuaded the price is steep, most experts agree the two businesses are very complementary. Not to say, they have likely been eyeing each other for particular years, says Sylvain Charlebois, the dean of the faculty of management at Dalhousie University in Halifax.

«This minutia deal was inevitable in my mind,» he said in an interview with CBC News.

Metro and Jean Coutu’s practical merger5:47

As far back as 2013, Charlebois says, Metro was mulling an acquiring of the Safeway grocery chain, before rival Sobeys swooped in and acquire the chain for $5.8 billion.

A few months later, Loblaw made an regular bigger splash, buying Shoppers Drug Mart for $12 billion. A mellifluous of consolidation was underway — but Metro found itself without a dance companion.

«That got Metro thinking about the beyond-food space,» Charlebois turned. «Basically to growing [beyond] the Quebec market it had to acquire something — or get got.»

He says the deal is good for both sides because they both conscious of the Quebec market and thrive in it. Moving further into drugstores is a about move for Metro, Charlebois says, because it diversifies the chain away from razor-thin profit verges in the grocery business.

Quebec’s population is aging, and «older consumers penury medication,» he said. «That’s a nice portal into a really lucrative deal in for Metro.»

And Jean Coutu is no ordinary drugstore chain. Unlike some others, which pretty much just resell products, Jean Coutu actually manufactures generic medications, which allows it to keep more of the profits.

The chain is also a actual estate behemoth. It owns 184 buildings across the province, Desjardins analyst Keith Howlett suggests, and since most of the locations are owned by franchisees, the chain derives uncountable of its profits from charging rent, service fees and royalties.

«There is apartment to sell real estate assets to drive higher returns.»

Howlett conjectures Metro hasn’t bought back any of its own stock in the most recent point, a sign the chain has been hoarding its cash in anticipation of a major do business like this one.

Jean Coutu Group 20170711

Chairman Jean Coutu controls the company that transports his name via the chain’s dual-share structure. (Graham Hughes/Canadian Importune)

This isn’t the first time suitors have come calling for Jean Coutu, but antecedent to advances were rebuffed by the chain’s eponymous founder, the 90-year-old patriarch of the series whose family still controls the company with a majority of voting divisions.

But Coutu himself supports this deal, which is key to its likely sensation.

«Although Metro’s interest in Jean Coutu was no secret,» TD analysts Michael Van Aelst and Evan Frantzeskos said in a note, «we are off guarded that the Coutu family is finally ready to sell.»

One likely goad to sell now was the Quebec government’s decision earlier this summer to assign $300 million less on generic drugs this year, a start the ball rolling that will be a direct hit to Jean Coutu’s bottom line as the South African private limited company controls about a third of Quebec’s drug market.

Amazonian intimation

It’s also possible that both companies are choosing to finally associate up because they see even bigger threats on the horizon. The grocery calling is always a tough one, but online retailer Amazon’s move to buy high-end fasten Whole Foods changed the landscape.

The new company is already cutting costs, and Amazon is managing to cut costs by bringing its online expertise to Whole Foods’ network of 431 accumulations, including more than a dozen in Canada.

«Metro’s share-price display had been disappointing in recent months as valuation contracted amidst Amazon’s force into fresh grocery, earnings risk tied to announced nominal wage hikes, and rising interest rates,» TD said in its analysis.

The deal-making be attractive to for the companies may be obvious, but there’s also an upside for both chains’ buyers, Quebec Finance Minister Carlos Leitao says.

«For consumers, it’s honest news because they’ll be able to get products at a lower price,» he mentioned on his way into a cabinet meeting Wednesday.

Whatever the motives, if the deal dies through it represents yet another major change in Canada’s always evolving grocery job. «We believe that a Metro/Jean Coutu combination makes critical sense,» TD said, «just as the Loblaw/Shoppers combination did.»

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