Loblaw and Shoppers Drug Mart

In mid-2013, the executive chairman of Loblaw Companies Ltd. was considering whether it was in his company’s best interest to acquire Shoppers Drug Mart. In December 2012, Loblaw had announced a proposal to create a real estate investment trust to which it would initially transfer approximately 75 per cent of its substantial real estate holdings, thus unlocking value for its shareholders. At the same time, Shoppers’ shares were trading at an historically attractive valuation. On the other hand, competition was heating up with the move of big box stores, such as Wal-Mart and Target, into Canada and the growth of online purchasing. Moreover, new government regulations aimed at decreasing the high cost of drugs had an immediate impact on pharmaceutical companies. With Loblaw’s shares trading near a six-year high, there was now the attractive opportunity to use them as currency to make an acquisition whose potential synergies were estimated to be in excess of $300 million per year. Was this a good time to act on what had been perceived for a number of years as an attractive merger option? Did it make strategic sense? If so, what price should Loblaw pay for Shoppers?