(Bloomberg) -- Canadian grocer Metro Inc. is in advanced talks to buy pharmacy chain Jean Coutu Group Inc. for C$4.52 billion ($3.64 billion) to diversify its business in an industry under increasing threat from Amazon.com Inc.'s food expansion.
Metro is offering C$24.50 a share in cash and stock for Varennes, Quebec-based Jean Coutu, or 6 percent higher than Coutu's closing price Tuesday in Toronto. The two companies haven't reached a definitive agreement, according to a joint statement Wednesday.
The potential deal sent both stocks soaring as it would tie up two giants from Quebec and give Metro an expanded foothold in the drug business, mirroring Loblaw Cos.' purchase of Shoppers Drug Mart four years ago. Jean Coutu's earnings had been under pressure due to new provincial regulation on generic drugs, though a compromise was recently found with the government.
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Canadian grocers, which were locked in a price war and are just coming out of a prolonged bout of food deflation, now have to get ready for Amazon, which in June agreed to buy Whole Foods Market Inc. The U.S. behemoth is also reported to have plans to roll out its Prime Now delivery service for groceries and other items in Canada this year.
With Coutu, Montreal-based Metro would add 419 stores in Quebec, Ontario and New Brunswick, along with 20,000 employees. Metro already operates more than 250 drug stores, and 600 grocery outlets in Ontario and Quebec.
Couche-Tard Stake
The transaction would push Metro's debt to earnings ratio to about 3 to 3.5, about the same levels faced by Loblaw after its Shoppers acquisition, according to Irene Nattel, an analyst at RBC Capital Markets. That would fall to about 2.5 if the grocer decided to sell its 32.2 million shares in Alimentation Couche-Tard Inc. to help finance the deal, she wrote in a note to investors. Couche-Tard dropped 1.6 percent to C$58.14.
Combined, the companies would have the second-largest pharmacy group in Quebec, according to Nattel. The biggest chain, which stemmed from McKesson Corp.'s purchase of Uniprix Inc. earlier this year, faced no regulatory hurdles, she added.
Jean Coutu is controlled by the Coutu family, which started the drug store chain in 1969. The family supports the deal, which would be paid 75 percent in cash and the remainder in stock, according to the statement.
Both companies declined to comment beyond the statement.
Metro rose 9 percent to C$43.70 at 3.24 p.m. in Toronto, the biggest gain in almost three years. Coutu jumped 6.5 percent to C$24.58.
--With assistance from Aoyon Ashraf
To contact the reporter on this story: Sandrine Rastello in Montreal at srastello@bloomberg.net.
To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net, Jacqueline Thorpe
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