Canada's Metro in talks to buy Jean Coutu for $3.6 billion, shares soar

(Reuters) - Metro Inc MRU.TO, Canada's third-biggest food retailer said on Wednesday it was in talks to buy pharmacy chain Jean Coutu Group PJCa.TO in a deal that values the company at C$4.5 billion ($3.62 billion), sending shares of the target surging to multi-year highs.

Jean Coutu operates drugstores in Quebec, New Brunswick and Ontario, and it acquired a generic drug maker in 2007. Metro operates more than 600 food stores across Canada.

Montreal-based Metro is offering C$24.50 per share for the Varennes, Québec-based Jean Coutu, the companies said in a statement. That represents a 6.1 percent premium to Jean Coutu’s price before a trading halt.

Jean Coutu shares jumped as much as 6.8 percent to their highest level since April 2015 after the announcement. They were trading up 4.9 percent at C$24.24 at 17:43 GMT.

Metro shares advanced as much as 5.8 percent, their biggest intraday gain since April, to C$42.41.

Metro’s offer consists of 75 percent in cash and 25 percent in its shares, the companies said in a statement.

The Coutu family has said it will support the deal, according to the statement.

The news comes at a challenging time for both Quebec-based companies, as competition ramps up among food retailers and provincial regulations over drug pricing weigh on pharmaceuticals.

Quebec in July announced a deal with generic drug manufacturers to cut costs for the province that analysts said would hurt the profitability of Jean Coutu’s generic drug manufacturing division.

The industry is also under pressure since Inc AMZN.O made its push into grocery business with the $13.7 billion purchase of Whole Foods Market, stoking fears that brutal market share battles will intensify.. Inc.’s announcement in August that it would cut prices on a range of goods at it completes its acquisition of Whole Foods Market Inc. has weighed on brick-and-mortar retailers already trying to navigate falling sales as customers continue to move online.

Metro’s Chief Executive Officer Eric La Fleche alluded to the “challenging environment marked by strong competition and continued food price deflation” in its third-quarter earnings statement in August. The retailer still managed to post a 3.7 percent increase in net earnings.

Metro bought a majority stake in Montreal-based meal kit maker MissFresh in August.

Reporting by Yashaswini Swamynathan in Bengaluru and Nichola Saminather in Toronto; Editing by Sriraj Kalluvila and Cynthia Osterman