DBRS Places METRO INC.’s Ratings Under Review with Developing Implications after the Announcement of Exclusive Discussions Regarding a Combination with Jean Coutu

DBRS Limited (DBRS) placed the Issuer Rating and Senior Unsecured Debt rating as well as the Short-Term Issuer Rating of METRO INC. (Metro or the Company) Under Review with Developing Implications following the Company’s announcement that it is in exclusive discussions with The Jean Coutu Group Inc. (PJC) regarding a combination agreement. The announcement indicated that the shares of PJC would be acquired by Metro for $24.50 per share (for a total of approximately $4.5 billion, and DBRS notes that PJC does not have a material level of balance sheet debt to assume). The transaction remains subject to the negotiation of definitive agreements and to regulatory approvals. The Company stated that the consideration would be payable through a combination of cash (75%) and Metro shares (25%).

On a pro forma basis, DBRS estimates that the combined entity would generate sales of nearly $16.2 billion and EBITDA of approximately $1.3 billion (excluding any potential synergies). DBRS believes PJC has strong brand and market positions within Québec as well as a complementary generic drug manufacturing business. PJC has approximately 418 locations and 1,350 employees (as of March 4, 2017, including Pro Doc, PJC’s generic drug manufacturing subsidiary).

The Under Review with Developing Implications status reflects DBRS’s view that Metro’s business profile should benefit from increased scale, more diverse product offering and potential synergies in addition to reflecting the increased exposure to regulatory reforms, an expectation of an increase in financial leverage as well as uncertainty around final financing intentions and any possible deleveraging plans.

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 potential synergies; (2) Metro’s financial risk profile on a pro forma basis, including the free cash flow generating capacity of the combined entity, which is a key indicator in the Company’s ability to reduce leverage within a reasonable time frame; and (3) the Company’s longer-term business strategy and financial management intentions.

DBRS will proceed with its review as more information becomes available and aims to resolve the Under Review status as soon as possible.

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 principal methodology is Rating Companies in the Merchandising Industry, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.