DBRS Correction: Loblaw Ratings Under Review with Developing Implications Following Announcement of Potential Acquisition of Shoppers Drug Mart

In terms of placing the ratings of Loblaw Companies Limited Under Review with Developing Implications yesterday, DBRS would like to clarify that the calculation of the lease-adjusted debt-to-EBITDAR ratio excludes Loblaw’s Financial Services division; that is, it would be adjusted to exclude PC Bank securitization and GICs. The complete text of the revised press release follows.

DBRS has today placed all ratings of Loblaw Companies Limited (Loblaw or the Company) Under Review with Developing Implications following the Company’s announcement of an offer to acquire the shares of Shoppers Drug Mart Corporation (Shoppers; see separate press release) for $12.4 billion and the assumption of approximately $1 billion of debt (the Transaction). The closing of the Transaction is subject to the approval of the shareholders of Shoppers and Loblaw, which is expected in September 2013.

The consideration offered for the equity consists of up to $6.7 billion in cash and up to 119.9 million Loblaw shares. The Transaction is expected to be financed through the combination of: (1) approximately $1.6 billion of cash, (2) $5.1 billion of fully committed bank facilities (including a $1.6 billion bridge loan), and (3) a subscription of $500 million additional Loblaw common shares from George Weston Limited (Weston).

On a pro forma basis, the combined company generated over $42 billion in revenue, $3 billion in EBITDA, and $1 billion in free cash flow. DBRS expects Loblaw to realize significant synergies by leveraging the strengths of both organizations, including the private label and loyalty programs, supply chain, and marketing. The Company believes it can achieve annual cost synergies of $300 million by year three. DBRS notes that these synergies are not dependent on any store closings.

Loblaw intends to operate Shoppers as a separate operating division. The Acquisition will increase Loblaw’s scale and improve its position in the growing health and wellness space in Canada.

The Developing Implications of the Under Review status reflects DBRS’s view that Loblaw’s business profile should benefit from increased scale, more diverse product offering, and potential synergies, which combined with the Company’s intended deleveraging plan, should largely offset the risks associated with the initial increase in financial leverage.

In its review, DBRS will focus on: (1) assessing the business risk profile of the combined entity as well as the risks associated with integration and realization of synergy potential, (2) Loblaw’s financial risk profile on a pro forma basis, including free cash flow generating capacity of the combined entity, a key indicator in the Company’s ability to reduce financial leverage within a reasonable time frame, and (3) the Company’s longer-term business strategy and financial management intentions.

Should the transaction close according to the proposed terms and provided that DBRS gains comfort with the Company’s ability and willingness to de-lever such that lease-adjusted debt-to-EBITDAR is below 3.50 times (excluding Financial Services; i.e., adjusted to exclude PC Bank securitization and GICs) within 18 to 24 months, the ratings would likely be confirmed. DBRS will proceed with its review as more information becomes available and aims to resolve the Under Review status by the closing of the transaction.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.