Jean Coutu price was high but will pay long-term dividends, says Metro CEO

MONTREAL — The cost of buying the Jean Coutu Group was high but the pill wasn’t too difficult to swallow because it will generate a good return on the investment, Metro Inc. chief executive Eric La Fleche said Monday.

“Yes, the price was not ‘cheap,’ but it was justified and the potential is there,” he said after speaking to the Canadian Club of Montreal.

The Quebec-based grocer officially purchased the chain of pharmacies Friday with the closing of the $4.5-billion transaction announced last October.

This marriage between two Quebec retail jewels is expected to generate annual sales of about $16 billion from the operation of more than 1,300 supermarkets and pharmacies in Quebec, Ontario and New Brunswick.

Cost savings from the deal are estimated at $75 million over the next three years.

La Fleche told reporters that not only was Jean Coutu one of the last assets available, it was the best.

“It’s a unique brand and a unique network in Quebec. By combining our brands, we will save money.”

Consolidation has accelerated in the Canadian pharmacy sector since 2013 when Loblaw Companies announced an agreement to acquire Shoppers Drug Mart (Pharmaprix in Quebec) for $12.4 billion. Last April, it was McKesson Canada’s turn to swallow the Uniprix Group and its 330 pharmacies.

Even if Metro was able to participate in the industry’s consolidation, the grocer was forced to loosen the purse strings a little too much for some analysts.

Peter Sklar of BMO Capital Markets estimated that Metro paid 14 times Jean Coutu’s adjusted operating income, compared to just 11 times the profit Loblaw paid for Shoppers.

The analyst wrote in a recent report that the Quebec grocer becomes particularly exposed to the risks of the pharmacy sector, citing the possibility of a federal intervention to reduce the price of generic drugs.

“Despite the risks, we remain optimistic about Metro’s prospects,” he wrote. “The short-term potential for pharmacies to distribute medical cannabis could be a growth vector.”

Although La Fleche says the merger of Metro and Jean Coutu will result in growth, he wouldn’t say if it will lead to a rapid expansion of Jean Coutu pharmacies in Ontario.

“We think there will be opportunities for us,” he said. “In what form, it remains to be seen. We are not at this stage yet.”

The two distribution centres operated by McMahon in Montreal and Quebec City to fill Metro’s Brunet pharmacies will close, resulting in the loss of a few hundred jobs.

Companies in this story: (TSX:MRU, TSX:L)