Loblaw Companies Limited (TSE:L) has entered into a deal to buy Shoppers Drug Mart Corporation (TSE:SC) for C$12.4 billion ($11.9 billion).  As per the terms of the agreement, Loblaw will pay C$61.54 per share in cash and stock to Shoppers Drug Market, which is a dominant player in the drugstore chain business in Canada. The amount paid represents a 27 percent premium to Toronto-based Shoppers Drug Mart’s last closing price, says a report from Bloomberg.

Loblaw

Win-win deal for Loblaw and Drug Mart

“This transformational partnership changes the retail landscape in Canada,” Galen G. Weston, Loblaw’s executive chairman said in the statement. He further added that Loblaw Companies Limited (TSE:L) will be able to gain further market through its scale and capability in the competitive scenario.

As per a preliminary transcript from Thompson Reuters, Loblaw’s management believe that the transaction will combine the “complimentary strength of Canada’s number one food retailer and Canada’s number one pharmacy,” enabling better service to customers. The deal allows offering of Loblaw’s portfolio through Shoppers Drug Mart store network and likewise, Shoppers Drug Mart brand and pharmacy services will be offered in Loblaw stores.

Details of the agreement between Loblaw and Drug Mart

Shares of Loblaw Companies Limited (TSE:L) gained 3 percent C$49 at 8:42 a.m. in Toronto and the shares climbed 13 percent this year, which was almost equal to 14 percent rise in Standard and Poor’s/TSX index of consumer staples. Other company Shoppers Drug Mart increased 24 percent to C$60.

According to a statement, the annual revenue of the combined company could have been over C$42 billion in 2012. Earnings before interest, taxes, depreciation and amortization of both Loblaw and Shoppers Drug Mart were around C$3 billion last year.

Loblaw Companies Limited (TSE:L) will pay around C$33.18 per share in the form of cash, which will be assisted by a C$500 million sale of stock to George Weston Ltd, Loblaw’s controlling shareholders. Investors in Shoppers Drug Mart will be entitled to 0.5965 Loblaw common shares for each share they own.

Canadian retail industry facing stiff competition

Acquisition by Loblaw Companies Limited (TSE:L) will be the biggest deal between the two Canadian companies after Suncor Energy Inc. (NYSE:SU) (TSE:SU) acquired Petro Canada in 2009. Retail industry in Canada is facing tough competition from companies like Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT). In the previous month, Sobeys Inc inked a deal to acquire Safeway Inc. (NYSE:SWY) Canadian Stores paying C$5.8 billion.

One of the US based retailers; Target is in the process of opening 124 stores this year. Wal-Mart Stores, Inc. (NYSE:WMT), the world’s biggest retailer, will incorporate a fresh food section. Home improvement retailer Lowe’s Companies, Inc. (NYSE:LOW) and department store chain Nordstrom, Inc. (NYSE:JWN) are also gaining a foothold in Canada.

Retailers in Canada are struggling with the sluggish growth in demand due to factors like declined spending growth in the households. In the first quarter, domestic demand increased 0.6 percent annually, which is the slowest pace since the first quarter of 2009.