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Analyst Deal Competition Team Jean Coutu Analyst Deal Competition Team Jean Coutu September 27, 2018 Legal Disclaimer The information in this document is for EDUCATIONAL and NON-COMMERCIAL use only and is not intended to constitute specific legal, accounting, financial or tax advice for any individual. In no event will QUIC, its members or directors, or Queen’s University be liable to you or anyone else for any loss or damages whatsoever (including direct, indirect, special, incidental, consequential, exemplary or punitive damages) resulting from the use of this document, or reliance on the information or content found within this document. The information may not be reproduced or republished in any part without the prior written consent of QUIC and Queen’s University. QUIC is not in the business of advising or holding themselves out as being in the business of advising. Many factors may affect the applicability of any statement or comment that appear in our documents to an individual's particular circumstances. © Queen’s University 2018 Jean-Coutu Advisory Team Jamie Bennett Tina Fang Bronwyn Ferris Comm ’22 Comm ’21 Comm ’21 First-Year Rep QUIC IND QUIC C&H Garrett Johnston Reid Kilburn Sebastian Weersink Comm ’21 Comm ’20 Comm ’21 QUIC E&U QUIC C&H QUIC M&M Transaction Overview Transaction Overview Transaction Overview Organizational Changes ﹘ On May 11th 2018 Metro Inc. (Metro) – a retail chain – 1 acquired the Jean Coutu Group (Jean Coutu) – a pharmaceutical company – for an enterprise value of Jean Coutu will operate as a stand-alone division and will C$4.5B retain its brand name ﹘ The deal will be financed with 25% common shares of Metro and 75% cash, for total consideration of C$24.50 2 per share, representing a 15.4% premium(1) Francois J. Coutu will continue to lead Jean Coutu as ﹘ Metro has received committed debt financing of C$3.4B President from BMO, CIBC and National Bank 3 ﹘ Metro also aims to issue shares and sell assets, having already sold bonds – worth $1.2B – and shares in Alimentation Couche-Tard – worth $1.55B Francois J. Coutu and Michel Coutu have been designated by Jean Coutu to sit on the Metro Board of Directors Transaction Rationale Cost Protection Melding of Synergies: against the Marriage of two Network of $75MM changing two iconic experienced >1,300 industry (e.g. Quebec management locations Threat of brands Expectation teams of FCF per Amazon) share accretion Source(s): Bloomberg, Business Insider, Company Reports, Financial Post, Newswire 5 (1) Premium based on pre-announcement price Industry Overview Grocery Retail Landscape Types of Players Market Characteristics - Inherently recurring nature - Always a steady stream of customers, which makes grocery retail highly appealing - Loyalty becoming scarce - About 60% of shoppers who had never shopped in Aldi or Lidl before said they would if one opened near them - Most shoppers tend to shop at an average of four stores to meet grocery needs - Edge of store sales outpacing center of store sales - Edge of store sales outgrowing center of store sales by 3-4% each year Supermarkets Discounters - Volumes moving away from brands and pre- packaged foods to delis and fresh produce Historical EBIT Margins 8% 6% 4% 2% 0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 Metro Inc. Empire Company Loblaw Companies Source(s): Bernstein, Bain & Co., Company Reports 7 Pharmacy & Drugstore Landscape Market Share Market Characteristics 40% - 70% of prescription medication is for maintenance - Similar to grocery retail, purchases of prescription drugs are highly recurring in nature 30% - Higher EBIT margins than grocery retail - Grocery retail is encumbered by heavier and larger 20% products, some of which require refrigeration - Lower distribution costs in pharma retail - 93% of purchases are made with insurance 10% - Drug insurance plans cover 98% of Canadians - Public health insurance covers 1/3 of total 0% healthcare costs, but accounts for 43% of industry Jean Coutu McKesson Shoppers Other revenue Group Canada Drug Mart Generic v. Brand Name Drug Pricing Revenue Segmentation (2017) 120 3% 3% Prescription 13% Pharmaceuticals 90 Nonprescription Pharmaceuticals 60 Personal and Beauty Products Other 30 14% Eyewear and Eye Care 0 2007 2009 2011 2013 2015 47% Dietary Supplements Brand Name Generic 20% Source(s): Bernstein, Canadian Generic Pharmaceutical Association, IBISWorld 8 Historical Multiples and Share Price Performance EBITDA Multiples 14x 12x 10x 9.1x 9.0x 8x 8.4x 7.2x 6x 4x 30-Sep-15 31-May-16 31-Jan-17 30-Sep-17 31-May-18 Average Empire Company Loblaw Companies Metro Inc. Relative Performance 140 120 117 103 100 89 85 80 60 11-May-17 11-Aug-17 11-Nov-17 11-Feb-18 11-May-18 S&P/TSX Empire Company Loblaw Companies Metro Inc. Source(s): S&P Capital IQ, Yahoo Finance 9 The Changing Retail Landscape: 3 Emergent Trends 1 Heightened E-commerce Penetration 2 Private Label Growth 3 Increasing Retail Consolidation 10 Trend #1: Heightened E-commerce Penetration E-commerce: Two Different Forms Incumbent Dedicated With Online e-Retailers Channels In 2017, 7.4% of total retail sales in Canada were conducted online Worldwide Retail E-commerce Sales Quick Facts 6,000 24% ﹘ Retail e-commerce sales worldwide (for all categories) are expected to rise to $4.9T by 2021, thus comprising 17.5% 5,000 20% of total global retail sales 4,000 16% ﹘ The trend toward e-commerce is broad-based on an international scale; however, online retailing is more 3,000 12% prominent in some nations than in others Billion $US Billion 2,000 8% ﹘ Retail e-commerce sales were 16.9%, 15.5% and 12.1% of total 2017 retail sales in the U.K., China, and Norway, 1,000 4% respectively ﹘ The U.S. and Canada were 8th and 9th in the 0 0% world, with 7.4% and 6.2%, respectively 2015 2016 2017 2018E 2019E 2020E 2021E Gross Value (LHS) Share of Global Retail Sales (RHS) Source(s): Bernstein, Google Images, Statista 11 Case Study: The Rise of Amazon Amazon’s Meteoric Rise – Rebased Stock Price vs. S&P 500 Retailing Index 750 624.1 500 250 225.6 0 07-Jan-15 07-Aug-15 07-Mar-16 07-Oct-16 07-May-17 07-Dec-17 07-Jul-18 AMZN S&P 500 Retailing Index The rise of e-commerce is best exemplified by Amazon’s stunning growth Amazon Financial Figures All figures in US$MM 2012 2013 2014 2015 2016 2017 LTM Revenue 61,093 74,452 88,988 107,006 135,987 177,866 208,125 Gross Profit 15,112 20,271 26,236 35,355 47,722 65,932 80,715 EBITDA 2,508 3,547 4,365 7,879 11,668 15,039 20,631 Unlevered FCF 1,352 2,883 4,070 6,404 100,666 9,939 11,797 Source(s): S&P Capital IQ 12 Trend #2: Private Label Growth Types of Private Label Products Within the Grocery Industry 30% of the market share of established U.S. branded 1 Value Products packaged food players is at-risk 10% due to 10% due to better- 10% due to fresh- 2 Premium challenger food quality, shelf-stable prepared, deli-style brands private label products foods Private Labels Private label market share in U.S. food sales has 3 Fresh-Prepared Foods grown from 18.5% in 2014 to 19.2% over the last 12 months Private Label Growth – the Reason Why ﹘ “Hard discounters” such as Aldi and Lidl are forcing brick and mortar 40% retailers to offer private labels that are credible, yet price-competitive 30% ﹘ E-commerce disruptors such as Amazon are pushing retailers to offer private labels that provide an in-store experience that is sufficient to incentivize consumers to shop at brick and mortar locations 20% 4,000 10% 3,000 2,000 0% 1,000 Dish Care Surface Care Air Care Laundry Care 0 Branded Search Growth (Amazon) - April 2016 vs. March 2017 Current 2018E 2021E Aldi Retail Locations (USA) Lidl Retail Locations (USA) Non-Branded Search Growth (Amazon) - April 2016 vs. March 2017 Source(s): Bernstein 13 Trend #3: Increasing Retail Consolidation Consolidation and Acquisition Growth Global Consumer & Retail M&A Activity (US$B) - Global M&A has been fueled by historic cash reserves 500 468 among CPG and retail companies (>$1T at 2017 year end) - Canadian consumer M&A deal volumes increased 7% in 392 400 2017, with a strong outlook moving forward 358 - E-commerce and private label growth have put pressure 318 294 on margins, driving retail consolidation in the pursuit of 300 250 economies of scale 231 237 - Retailers have been forced to pursue acquisitions to 200 compete with e-commerce platforms in sales channel 154 variety and product range 100 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 Market Share of 3 Largest CDN Food Retailers Market Share of 3 Largest CDN Pharma Retailers 72% 66% 68% 62% 64% 58% 60% 54% 56% 50% 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 Source(s): A.T. Kearney, Bernstein, Company Reports, IBISWorld, Capital IQ 14 Justification Justification 1 Insulation from E-commerce Threat 2 Strong Strategic Fit 3 Cost and Revenue Synergies 16 Justification 1 Insulation from E-commerce Threat 2 Strong Strategic Fit 3 Cost and Revenue Synergies 17 Justification #1: Grocery Market E-commerce an Overstated Threat Overview & Barriers Facing E-Commerce Growth ﹘ In 2016, 3% of world-wide grocery sales were conducted online; of this 3%, 1.3% was comprised of incumbent grocers operating their own platforms, and the other 1.7% was comprised of non-grocers such as Amazon ﹘ However, just 25% of the grocery market can be more cost-effectively served by e-commerce; E-commerce may not pose as monumental threat to the grocery industry as some may believe ﹘ Barriers to entry include: Cold supply chains Deeply-ingrained customer habits Providing a credible range ﹘ Expensive and difficult to create ﹘ Is difficult, as most grocery products are ﹘ In the U.S., just 2.1% of 2016 grocery either locally-sourced, or require a sales were done online; when surveyed, curated range that is developed over just 26% of U.S.
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