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Vera sapore Consulting
Merger of Loblaws Co. & Shoppers Drug Mart Consolidation in Mature Markets
Ziwei Chen 10162767Colette Goh 10001697Marisa Harder 10001864Katie Taft 10024265Olivia Woods 10001707
November 20, 2014
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Agenda
• Background Information on Loblaws and Shoppers• Announcement of Merger• Motivations Behind Merger • Mechanics of the Merger• Shoppers Drug Mart’s Reaction• Impact on Customers• Impact on Investors• Conclusion
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Background Information: Loblaws Company Limited
• Loblaws is Canada’s largest supermarket retailer in the country (sales of $31 billion in 2012)
• Total industry revenues at least double nearest competitor• More than 1000 corporate & franchise stores• Mature and highly competitive industry, facing increasing consolidation
• 32.5% share of supermarket industry• Major local competitors were Sobeys Inc. and Metro• Increasing competition from major discount retailers such as Costco,
Wal-Mart, and Target• One of Canada’s largest private sector employers
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• Shoppers Drug Mart is the largest pharmacy chain in the country (Sales of $10.8 billion in 2012)• 47% of this revenue came from pharmacy sales
• Drug store industry is a mature and highly competitive industry• Largest competitor is Katz Group, followed by Jean Coutu Group, London
Drugs, Uniprix Group, and Pharmasave• 51,300 employees• 1,240 full-service drug stores with Convenient store locations• Shoppers Optimum Loyalty Card program
• Competitive strength (few pharmacies had this)
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Background Information: Shoppers Drug Mart
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Announcement of Merger
• On Monday, July 15th, 2013, Loblaws Co., Canada’s largest grocer announced that it would be acquiring Shoppers Drug Mart for $12.4 billion (CAD) in cash and stock• Will become one company in the face of increasing competition
• Still operated as separate entities• No job losses or stores closed
• 2348 stores and 1797 pharmacies after acquisition• 1 billion customer transactions annually
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Motivations Behind Merger: Location
• Loblaws will more than double its presence, (2300+ stores)• Retail is largely a real estate game of obtaining high-traffic locations before
competitors• Choice locations in Canada are in short supply
• Loblaws was motivated by Shoppers’ smaller downtown stores• Opportunity to sell groceries along side regular drugstore products• Wanted to capture young professionals who work in downtown areas early on
• Create a “top of mind” awareness for customers• Hoping customers while picking up something like cosmetics will also buy
fresh groceries
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Motivations Behind Merger: Market Protection/Power
• Increasing price pressure from low-cost competitors such as Target, Wal-Mart, and Costco• Loblaw will now be able to better withstand this pressure
• Will further raise credibility of Loblaws pharmacy• Will make it more challenging for new entrants to acquire customers
• Keeps Shoppers Drug Mart out of the hands of American rivals (i.e. Walgreens) and give Loblaws the purchasing power it needs to compete with big American retailers
• Will increase market share, revenues, and profit margins
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Motivations Behind Merger: Economies of Scale
• With more stores, Loblaws & Shoppers can spread costs and create synergies -$300 million annually within three years)• Cost savings in marketing, supply chain management, information technology,
and sharing of infrastructure, (e.g., distribution centers)• Reduction in merged firm’s cost of goods sold (COGS) as suppliers will be able to
offer volume purchase discounts• R&D costs spread over a larger number of units
• Can better develop President’s Choice and Life private label brands across far more customers• Allows the merged company to experiment with more products
• Opportunity to cross-sell in each other’s stores• More points of sale = reduce average cost
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Motivations Behind Merger: Diversification
• Adding Shoppers gives Loblaws even more leverage with pharmaceutical suppliers
• Shoppers a “go-to” store for premium-priced cosmetics with very high margins
• By having more products available, Loblaw can hopefully offset cyclicality in sales
• Loblaw will be diversified outside of food sales
• Now has banking, pharmaceuticals, clothing, and discount grocers • Is furthering Loblaw’s portfolio of diversified complementary businesses
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The Mechanics of the Merger: What is Loblaws buying?
• All outstanding Shoppers Drug Mart common shares in cash• Common Share Value = $33.18
• 0.5965 Loblaws common shares per each Shoppers Drug Mart common share, on fully pro rated basis
• Aggregate purchase price of approximately C$12.4 billion• Positive impact on both stock prices $3.07 billion in additional market value
• Loblaw shares rose $2.29 to $49.85 (up 4.84%)• Shoppers shares rose $11.50 to $60 (up 24%)
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Timeline of Acquisition
07/15/13 - Loblaws
announces definitive
agreement to acquire
Shoppers
09/12/13 – Shoppers
shareholders approve
acquisition
03/21/14 –
Competition
Bureau reaches
Consent
Agreement
03/28/14 –Acquisition
Completed
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• Shoppers Drug Mart shareholders who chose to receive cash will be paid:• $61.54 in cash or 1.29417 Loblaw common shares, plus $0.01 cash for each
Shoppers Drug Mart share held• Shareholders who did not make a choice will receive:
• Cash consideration as to 53.9% of their shares• Share consideration as to 46.1% of their shares,
• Shoppers Drug Mart shareholders ownapprox. 29% of the combined entity
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The Mechanics of the Merger: Shoppers Shareholders
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Competition BureauMerger subject to conditions:• Sale of 18 stores and 9 Loblaws-run pharmacies to an independent operator• Many behavioural restrictions related to how the grocery giant does business with
its suppliers• Conditions with suppliers will last up to five years from the deal’s closing
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The Mechanics of the Merger: Concerns
“The Bureau’s concerns re: Suppliers include:• Making suppliers financially accountable for competing retailers’ pricing decisions• Increasing incentives to penalize competing retailers for vigorous price competition• Diminishing incentives to continue to offer promotions to all retailers• Prompting Loblaw and some supplier interests to be aligned towards an increase in
wholesale prices paid by competing retailers”- Melanie Beauchesne, Spokeswoman, Competition Bureau Canada
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Shoppers Drug Mart’s Reaction to the Proposal
Both Companies’ board of directors unanimously determined that the proposal is in the best interest of their respective companiesShareholders of Shoppers Drug Mart have voted to approve a takeover by Loblaws• The deal was approved by 99.9 per cent of the votes• Assuming Shoppers investors opt for the maximum amount of Loblaw equity,
they would own about 29 per cent of the combined company.
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Shoppers Drug Mart’s reaction to the proposal
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"We are delighted to partner with Loblaws to leverage our combined strengths. For our shareholders, this transaction provides significant and immediate value, as well as the ability to benefit from future upside by virtue of their continued ownership of shares in the combined company. For our Associate-owners and employees, who are a valued part of the equation, it provides the opportunity to pursue rewarding careers as we grow together. And for our customers, it provides more locations with an enhanced mix of products and offerings that contribute to the good health of Canadians.”
- Domenic Pilla, President and CEO of Shoppers Drug Mart
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Shoppers Drug Mart’s Reaction to the Proposal
The proposed $12.4 billion deal, will keep the Shoppers brand name in place and allow it to operate as separate division of Loblaws.
• “We intend to preserve the great strengths of what the company has built by keeping Shoppers Drug Mart as a separate division of Loblaws, with its own dedicated management team led by Domenic Pilla.”
The merger will significantly enhance the customer experience by offering even greater assortments, service, value, and convenience while preserving the unique shopping experiences that make both companies leaders in their respective segments.
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The Impact on Customers
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More offers, more
choices and more
convenience
Price
Loyalty Program
The Impact on Customers
☐
☐
☐
✓
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More offers, more choices
and more convenience
Price
Loyalty Program
The Impact on Customers
☐
☐
☐
✓
✓
19Group 1
More offers, more choices
and more convenience
Price
Loyalty Program
The Impact on Customers
☐
☐
☐
✓
✓
✓
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Impact on Investors: Shareholders
20
Effects
Short-term • Shoppers stock closed at 24.2% higher than previous day
• Loblaw’s stock closed 5.4 % (rare for acquiring firm)
• Market value increased from $9.68 billion to closing 12.02 billion.
• Market value increased from $13.45 to $14.18 billion
• Purchase increases EPS by double digits (before merger growth projections were lower)
Long-term • Shareholders have three choices:take full capital gain on stocktake some capital and some Loblaw sharesswap shares for Loblaw equity
• Shoppers brings strong returns and lots of free cash flow
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Impact on Investors: Bondholders
Possible impact on bondholders after merger include: • Acquired firm (Shoppers) bondholders have their debts transferred to Loblaws• Risk to Loblaws debtholders: Loblaws wants to maintain its BBB-mid credit
rating. They are financing deal with term loan from Bank of America MerillLynch and bridge loan that Loblaw will replace through unsecured notes.
• Possibility of long term coinsurance “funds sharing”: If one firm defaults on debt, bondholders still get paid as they can draw on funds from other firm. Debt is less risky and more valuable.
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Conclusion
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• Beneficial to companies as it strengthens position against competitors by increasing synergies through economies of scale and offering better selection of products
• Beneficial to customers as they get better retail experience
• Definitely beneficial to shareholders as they receive higher returns