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Jean Coutu Group PJC Inc. & Metro, Inc. Merge, as Expected

Some would say the writing was on the wall for some time. The expectation that Canadian pharmacy retailer Jean Coutu Group PJC Inc. (TSX:PJC.A) and Metro, Inc. (TSX:MRU) would merge was one of the drivers behind both companies’ share prices in recent months.

In late July, I suggested investors consider this possibility at a time when few others would dare say that Jean Coutu would ever sell its business. It turns out the timing of that article was pretty decent, as the share price of Jean Coutu increased more than 16% and the price of Metro remained flat — a fact which makes sense, given the premium typically associated in an acquisition such as this deal.

The key drivers of the deal, it appears, stem from the companies’ Montreal connection and the changing market for pharmacies and generic pharmaceuticals in Quebec, making consolidation the easiest and perhaps most effective way to battle macroeconomic forces which have otherwise continued to unjustly hurt Jean Coutu’s bottom line for some time. Metro’s relative strength in the grocery retail industry and its proximity and business relationship with Jean Coutu made the merger more likely, although still surprising, given the fact that Jean Coutu’s governance structure provided a significant perceived hurdle in getting the deal done.

This transaction is slated to amount to $4.5 billion — a significant price paid for a company which was worth approximately $4 billion at the time of my most recent article on the rumoured merger. The combined entity will be better able to tackle its two larger rivals in the grocery retails space after Loblaw Companies Ltd. announced its 2013 acquisition of Shoppers Drug Mart for $12.4 billion — an amount which paved the way for other pharmacy-related businesses such as Jean Coutu to consider an existence that would not be independent.

Bottom line

This merger provides scope, scale, and diversification for Metro — a company which I believe is likely to continue to outperform its peers in the long run due to its stable, profitable business operations and its opportunities for continued expansion in the medium to long term relating to additional bolt-on acquisitions. This deal supports the company’s existing base in eastern Canada, and I would expect that Metro continue to look for opportunities further west in a bid to take on Loblaw and Empire Company Limited.

Jean Coutu’s share price appears to be fully valued, and I would wait until the merger goes through before ascribing any additional value to the combined firm.

Stay Foolish, my friends.

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Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.

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