Will Tough Restrictions Hinder Loblaw’s Success?

Competition Bureau imposes stiff rules on Loblaw’s merger with Shoppers.

| More on:
The Motley Fool

Since the first announcement that Loblaw (TSX: L) would be purchasing Shoppers Drug Mart (TSX: SC) for $12.4 billion, investors have been waiting for the Federal Competition Bureau to approve the deal. The FCB has given the green light for the merger, but has attached a couple of restrictions to ensure continued competitiveness in the market.

Relief to suppliers

The first stipulation imposed by the FCB has to do with how Loblaw can deal with current suppliers of Shoppers, and how it can leverage its new market share to set prices. These “behavioural restrictions,” which will be in effect for the next five years, are intended to prevent Loblaw from pushing up wholesale prices for its competitors.

Another restriction comes in the form of Loblaw being prohibited from “signing agreements that use sales volume at Shoppers as extra weight for its existing profit margin agreements.”

A major factor in the FCB imposing these new forms of restriction may stem from how Sobeys, a division of Empire Company Limited (TSX:EMP.A) has been battling its suppliers since the acquisition of Safeway.

The sell off

The other key piece of the FCB decision comes in the form of disinvestment, Loblaw has been ordered to sell off 14 Shoppers locations and four Loblaw stores. This is similar to the FCB ordering Sobeys to disinvest 23 locations as a condition of approving its Safeway merger. The majority of the locations ordered to be disinvested are located in smaller mostly rural communities spread over nine provinces.

Foolish bottom line

Now that the FCB has given its approval, Loblaw expects the deal to be completed by March 28, 2014. This news pushed Shoppers stock to a 52-week high of $61.88, and Loblaw saw a modest bump and closed up 1.7% at $47.01. Once completed Loblaw is predicting that it will be able to generate about $300 million in annual savings by 2017, and expects to achieve this without any store closures.

This merger places Loblaw in an interesting place in the market, first off it has acquired a massive foothold in the pharmacy and wellness sector. Also it has gained a substantial footprint in rural and suburban Canada, a place where it would not be cost-effective to build and operate a Superstore.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Cameron Conway does not own any shares in the companies mentioned.

More on Investing

thinking
Bank Stocks

Is it Too Late to Buy Bank of Nova Scotia Stock?

Bank of Nova Scotia should be higher than it is today, and you get paid well to wait for the…

Read more »

Airport and plane
Stocks for Beginners

If You’d Invested $1,000 in Air Canada Stock in 2014, This Is How Much You Would Have Today

Not everyone has seen their shares of Air Canada (TSX:AC) stock decline. But if you were to invest today, would…

Read more »

crypto, chart, stocks
Tech Stocks

2 Artificial Intelligence (AI) Stocks That Could Go Parabolic

Palantir Technologies stock and this tiny Canadian AI stock could rally as their new platforms bring new customers in 2024.

Read more »

Plane on runway, aircraft
Dividend Stocks

Down 40% From All-time Highs, Is Cargojet Stock a Good Buy Today?

Cargojet stock trades at a significant discount to consensus price target estimates in 2023.

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

2 Companies With the Firepower to Raise Their Dividends

Here are three top Canadian dividend stocks long-term investors may want to consider, based on their potential for dividend growth…

Read more »

financial freedom sign
Investing

3 Stocks That Could Help You Retire a Millionaire

Are you looking for stocks that could help you retire a millionaire? Here are three top picks!

Read more »

A bull outlined against a field
Investing

1 Top Bargain Stock That’s Ready for a Bull Run!

Restaurant Brands International (TSX:QSR) stock could be off to the races, as it aims to run with the bull market.

Read more »

tsx today
Investing

TSX Today: What to Watch for in Stocks on Thursday, February 29

TSX investors will closely watch the U.S. personal consumption expenditure and Canada’s GDP growth numbers today.

Read more »