Jean Coutu Group Inc. (PJC/A), the second-best performing pharmacy stock in North America in the past three years, is poised to buy up smaller rivals as it hoards cash amid consolidation in Canada’s retail industry.
The Longueuil, Quebec-based company has built up cash of about $462 million by selling a 28 percent stake in Rite Aid Corp. (RAD:US) in three different equity transactions since April, according to statements released by the company.
The reserves and lack of debt raised speculation that Canada’s most acquisitive pharmacy chain will look for more deals after Loblaw Cos.’s C$12.4 billion purchase this month of Shoppers Drug Mart Corp. (SC), the country’s biggest drug-store firm.
“We believe this Rite Aid sale and the preceding one have increased the possibility that Jean Coutu could be preparing to make an acquisition,” said James Durran, a Toronto-based analyst at Barclays Plc, who rates Coutu the equivalent of a hold, in a note to clients on July 17.
The Rexall pharmacy banner, owned by closely held Katz Group Pharmacies Inc., based in Edmonton, and Sobeys Inc.’s Lawton drugs are potential acquisition targets, Durran said in the note, declining further comment.
Coutu declined to comment on potential acquisitions or future strategy, Helene Bisson, a spokeswoman for the company, said in an e-mail. Katz Group declined to comment, said Brian McLaughlin, a company spokesman, by phone July 25. Lawton Drugs is not for sale, said Barbara McCully, a spokeswoman for the company, on July 24.
Coutu shares rose (2FA:US) 0.2 percent to C$19.32 at 9:48 a.m. in Toronto after climbing 2.5 percent yesterday to C$19.29 for a market value of C$4.2 billion ($4.1 billion). Coutu gained 33 percent this year, making its stock an attractive currency for potential deals. Over three years, Coutu advanced 122 percent, behind only Rite Aid’s 231 percent gain among five North American drug stores tracked by Bloomberg News.
Coutu sales were below analysts’ estimates in five of the last eight quarters, according to data compiled by Bloomberg. Pharmacy competition is set to increase from a Loblaw-backed Shoppers Drug Mart.
Shoppers Drug Mart has 1,363 locations, and added an average of 54 locations a year over the past five years, according to data compiled by Bloomberg. Coutu has 411 stores, increasing by an average of 15 stores per year in the same time period. Quebec is the location of 92 percent of Coutu’s outlets, with the remaining stores in New Brunswick and Ontario. Just 18 Jean Coutu stores have been renovated or expanded this year, according to Bloomberg data.
Jean Coutu lacks a plan for growth, acquisitions and capital deployment, Perry Caicco, an analyst at CIBC World Markets in Toronto, said in a note dated July 10, declining further comment.
“Coutu’s never had as compelling a store experience,” and Loblaw’s acquisition of Shoppers will make that gap more pronounced, said Kenric Tyghe, an analyst at Raymond James, in a phone interview from Toronto.
Loblaw announced plans last week to open six new Quebec stores, signaling an increased presence in Coutu’s home province. Coutu will also face increased competition from Minneapolis-based Target Corp. (TGT:US), North America’s third-largest retailer, which plans to open 25 stores across the province starting in fall 2013. Sebastien Bouchard, manager of public relations for Target’s Canadian operations, did not respond to a voice mail left for him yesterday.
Coutu has relied on takeovers for growth in the past, with five acquisitions worth $2.62 billion since 2000. Shoppers made five acquisitions valued at $148.19 million over that same period, according to data compiled by Bloomberg.
Coutu, founded by pharmacist Jean Coutu in 1969, purchased 80 Osco Drug stores in Maine, Massachusetts and New Hampshire in 2001 and two Pharma-save locations in Ontario in 2003, according to Bloomberg data. These acquisitions preceded the company’s foray into Rite Aid in 2006, when it became the largest shareholder of the Camp Hill, Pennsylvania-based company after selling its Eckerd and Brooks chain to Rite Aid for $3.4 billion. Jean Coutu, now 86, acts as the company’s non-executive chairman, after stepping down as chief executive officer in 2007.
Coutu began selling its shares in April, as Rite Aid rose 65 percent from the beginning of the year. Rite Aid shares fell about 61 percent from the time Coutu acquired the shares in 2006 until it began selling them in April. Coutu also expanded into drug and health device production, buying Pro-Doc Ltee, an indepedent drug maker, in 2007, and Le Groupe Medicus, an orthotics and prosthetics company, in 2012.
“Jean Coutu has a new, expanded distribution center and cash on hand from its final sale of Rite-Aid shares,” said Professor Manish Kacker of McMaster University’s DeGroote School of Business. “This gives them the resources and capabilities needed to acquire other pharmacy chains, a strategy that they have used in the past to grow their business.”
Rexall, with 425 locations across Ontario and the west coast, offers access outside the Quebec market. Lawton Drugs may come onto the market as Sobeys plans to sell C$1 billion in non-core assets to support its June bid for Safeway Inc. (SWY:US)’s Canadian grocery stores, according to Durran. Lawton Drugs has more than 80 stores across the Maritimes, according to its website, a market close to Coutu’s Quebec stronghold.
Richmond, British Columbia-based London Drugs, may not be a good fit because the chain’s west coast stores are too far from the company’s Quebec operations, Durran said. London Drugs, which has 77 stores in the western provinces, did not respond to voice mails for comment yesterday.
While the Shoppers/Loblaw deal presents a challenge to Coutu’s dominance in the Quebec market, it also provides potential expansion opportunities, Kacker said.
“The overlap between Loblaw and Shoppers locations may force Loblaw to give up some of the Shoppers locations in Ontario,” said Kacker. “Jean Coutu could attempt to take over these locations if they decide to expand westwards and enter the southern and western Ontario markets.”
The recent wave of consolidation through the Canadian retail industry has also fueled speculation Montreal-based grocer Metro Inc. (MRU) is in the market to acquire a pharmacy chain like Coutu.
“It is now imperative for Metro to make an acquisition,” said CIBC’s Caicco, in a note to clients dated July 16. “That puts Jean Coutu in the gun sites.”
Metro declined to comment on acquisition speculation regarding Jean Coutu, a spokeswoman for the company said on Aug. 6.
Being a target of an acquisition rather than an acquiring party seems the less likely of the two alternatives, said Derek Dley, an analyst at Canaccord Genuity.
“I would say it’s more likely, looking at them, to consolidate,” Dley said in a phone interview on July 22 from Toronto. “Seeing some decent consolidation opportunities, some smaller store networks out there. That could be why they have this strong cash balance.”
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