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Quebec retail brands Metro, Jean Coutu to merge in $4.5 billion deal

A Jean Coutu pharmacy is seen Wednesday, September 27, 2017 in Ste. Marthe-sur-le-Lac, Quebec. Two of Quebec's iconic retail brands are planning to merge with Metro Inc.'s $4.5-billion takeover offer for the Jean Coutu pharmacy group. Monday, Oct. 2, 2017.
A Jean Coutu pharmacy is seen Wednesday, September 27, 2017 in Ste. Marthe-sur-le-Lac, Quebec. Two of Quebec's iconic retail brands are planning to merge with Metro Inc.'s $4.5-billion takeover offer for the Jean Coutu pharmacy group. Monday, Oct. 2, 2017. The Canadian Press/Ryan Remiorz

Two of Quebec’s iconic retail brands are planning to merge with Metro Inc.’s $4.5-billion takeover offer for the Jean Coutu pharmacy group.

Shareholders of Jean Coutu (TSX:PJC.A) 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.

Quebec’s second-largest pharmacy network will operate as a separate division of the grocery company, headed by Francois Coutu, son of the company founder.

Jean Coutu shareholders would own 11 per cent of Metro (TSX:MRU) and the pharmacy chain will appoint two board members.

READ MORE: Metro eyes possible merger with Quebec-based pharmacy chain Jean Coutu Group

The chairman and company namesake said the combination will safeguard’s Jean Coutu Group’s entrepreneurial vision and allow it to grow.

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“Bringing together our two highly-respected and long-standing Quebec brands represents an exciting milestone in the history of the Jean Coutu Group,” stated Jean Coutu.

Metro chief executive Eric La Fleche said the grocery chain intends to build on the Jean Coutu brand’s legacy.

“It is a unique opportunity to bring together each company’s expertise to better serve the growing consumer demand for healthier choices, value and convenience,” he said in a news release.

READ MORE: Jean Coutu open to selling medical marijuana, but won’t lobby federal government

The takeover follows Loblaw Companies Ltd.’s (TSX:L) $12.4-billion cash-and-stock deal in 2014 of Shoppers Drug Mart, which operates as Pharmaprix in Quebec.

Canadian supermarket chains are beefing up as they compete against Wal-Mart, Costco and Amazon’s entry in the grocery space with its purchase of Whole Foods.

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

READ MORE: Lowe’s takeover of Quebec-based Rona approved by Competition Bureau

The combined company will have about $16 billion in annual revenues and $500 million in free cash flow, including $75 million in cost savings within three years.

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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 deal is expected to close in the first half of 2018.

The Coutu family and affiliated entities which hold 93 per cent of voting rights, along with company directors and senior officers, have agreed to vote in favour of the deal.

Metro said it will sell undisclosed assets. Irene Nattel of RBC Capital Markets said a key outstanding question is whether the company will sell its 32.2 million shares of Alimentation Couche-Tard (TSX:ATD.B).