TORONTO–When Canada’s largest drugstore chain was put on the market last August, there was much speculation about who would be the new owner of the company chairman and chief executive officer David Bloom has called, “the jewel of the St. Lawrence River.”

Would it be Edmonton entrepreneur Darryl Katz? Quebec pharmacy family the Jean Coutu Group? Or would Shoppers be swallowed up by a U.S. mega-chain like Walgreen’s or CVS Corp.? There were also reports that Canadian investment giant Onex Corp. had been putting together bids on Shoppers in between meetings for its failed takeover of Canadian Airlines.

In the end, it was U.S. leveraged-buyout monolith Kolhberg Kravis Roberts Inc. (KKR) that added the Shoppers jewel to a crown already studded with international brand names and powerful investment and monetary funds. The deal is the largest leveraged buyout in Canadian history, according to Shoppers Drug Mart chairman and chief executive officer David Bloom.

In preparation for the sale, Imasco approached 90 potential buyers. There were seven final bidders for the 823-drugstore chain, known as Pharmaprix in Quebec. Confidentiality agreements protect all details of the final bidding process, including the identities of five of the bidders.

But for the sixth, the price–$2.55 billion–was just too high. “We have a very stable financial situation, and we won’t risk that [for the sake of growth],” says Francois Coutu, president and chief operating officer of the $1.1-billion Jean Coutu Group.

Coutu’s decision doesn’t mean KKR paid too much for Shoppers, says financial research analyst Catherine Skerritt of Scotia Capital. “In the context of where they [Coutu] were–which was thinking of buying a company that was bigger than they are–they decided they couldn’t afford it.”

The price, the investment team and the incorporation of the existing Shoppers Drug Mart management team are a huge vote of confidence for Bloom and his organization, says retail industry consultant John Torella of the J.C. Williams Group in Toronto, Ontario.

“They’ve indicated their full support of SDM management, which is a big positive,” says Torella. “On the other hand, there is a tremendous debt being created, which will put pressure on management to rationalize, perhaps even to cutback on some of its not-so-profitable outlets.”

The transaction, scheduled to close in February, will be financed through $900 million in equity, to be provided by the six partners in the deal: KKR, Bain Capital, Charlesbank Capital, DLJ Merchant Banking, the Ontario Teachers’ Pension Plan Board and a Shoppers ownership team made up of senior managers and 650-plus associates. Shoppers executives and associates will own between 10% and 15% of Shoppers Drug Mart Inc., which means they’re responsible for between $90 million and $135 million of the equity commitment. Senior managers will be reinvesting their Imasco shares into the new Shoppers Drug Mart Inc., while associates are being asked to purchase private shares.

At the other end of the “lever” in the leveraged buyout is $1.65 billion in debt.

“The debt becomes the company’s, showing up on its balance sheet,” says Molly Morse, a spokesperson for KKR. “The goal of company management is to improve their company’s performance in order to pay down that debt.” The total debt, including legal fees and expenses, is $1.775 billion.

A public share offering could certainly help reduce the debt; however, Morse says that KKR generally holds on to its investments for at least five years. And while Richard Talbot, a consultant with Thomas Consultants International in Toronto, suspects that KKR will “spin off” Shoppers to a U.S. chain or otherwise sell it off to make a quick buck, Bloom says that notion is way off the mark. “Why would we and our associates be investing in something that was going to be sold off? “We’re buyers, not sellers. We’re planning to grow.”

“It’s a good buyer strategy to allow management to participate in the equity portion of the deal,” says Scotia Capital’s Skerrit. “The way you do well in a leveraged buyout is to allow the company you acquire to run and grow, to pay down the debt, and to increase in value.”

It’s KKR’s standard buyout strategy to “invest in strong management teams and then allow them to have strong ownership in the company,” says Morse. “The philosophy is that the best corporate managers think like–and are–owners.”

Neither consumers nor Shoppers employees should see too much change under the new regime. “In the short term, there will be little or no change, since they’ve left the existing management team in place,” predicts Talbot. Morse confirms that KKR tends to be “hands off” when the company has decided to work alongside existing management. While KKR will place members on the board of directors of the new company, “our board members don’t take an active role in running the business,” says Morse.

The deal, which was announced on November 18, must be approved by Imasco shareholders and is expected to close in February.


David Bloom, chairman and chief executive officer of Shoppers Drug Mart Inc., shares some of the details of the past few months–and what lies ahead–with Karen Welds, editor of Pharmacy Post.

Q: On a scale of one to 10, how would you rate the outcome of the sale?

A: I give it a solid nine. The group [of new owners] has an excellent track record. I’m especially pleased with the Ontario Teachers’ Pension Plan Board–it’s an outstanding Canadian organization. And KKR is very impressive. Very entrepreneurial. We couldn’t have asked for a more perfect fit.

Q: So why not give the deal a perfect 10 out of 10?

A: Because we could have been happy with other people as well. It was really win-win, whether it was an LBO [leveraged buyout] specialist or an in-market player. The in-market bidders could have fit, and we would have had a very strong group. So there were other very exciting opportunities, but we are elated at the outcome.

Q: Was Onex one of the LBO bidders?

A: I don’t want to confirm or deny that. I’ll only say that the LBO players were both American and Canadian.

Q: Can you tell us anything else about the bidding process?

A: It was a very rigorous process. Very demanding. We had to do presentations to a short list of bidders. There were seven in total. I can’t give any names or even the breakdown between the in-market and LBO players.

We couldn’t get involved until after the presentations, at which time we could all talk freely. We got to know all of them and, initially, we had no leanings one way or the other.

Q: Is it true you’d already been contacted by LBO firms last summer?

A: Yes, but they hadn’t approached us from the point of view of doing a deal. They just wanted to know if there was an interest … We never approached anyone.

Q: What happened when the KKR team was selected as the winning bidder?

A: KKR approached the senior management of Shoppers Drug Mart to become equity partners. I made a personal commitment to stay on as chairman and chief executive officer for the next five years. The other members of the Board of Management have also agreed to become equity partners. Basically, all of our senior leaders will be reinvesting the money from their Imasco shares, less the tax to be paid, back into Shoppers Drug Mart Inc. This significant equity investment certainly indicates our high level of commitment to the future of Shoppers Drug Mart.

Q: Where do Shoppers Drug Mart associates fit in?

A: A day after the sale was announced, I was accompanied by a group of senior executives from Shoppers Drug Mart on a cross-Canada tour to visit all of our regional offices. We met with both our management and support staff, as well as members of our ‘peers’ groups, which are our associate representatives. We discussed the announcement, talked about the tomorrows and the new structure of our company. We also shared with our associates the exciting opportunity to purchase shares in Shoppers Drug Mart Inc. We believe our associates were very excited by the investment opportunity and we anticipate all of our 650 associates will participate. So far, we haven’t heard a “no.”

Q: Are associates being asked to buy a minimum number of private shares?

A: There’s no minimum, but there are limits since the Shoppers Drug Mart group, including senior management, is restricted to 10% to 15% of the equity of the new company. However, the other very exciting aspect of this arrangement is the possibility that some time in the future, the company could have an initial public offering. This could be an opportunity for everyone in the company, both in the offices and stores, to purchase shares in the company.

Q: At least one retail analyst has said that the deal has created a tremendous debt-load for the company. The pressure is on to boost revenue and/or rationalize the business, perhaps even by closing less-profitable stores. How do you respond to the suggestion that you may have bitten off more than you can chew?

A: Our short- and long-term sales and profit projections demonstrate that we are well financed. We are continually relocating, retrofitting and expanding stores to increase our profit performance. Productivity has always been a key to our enhanced performance and we continually set aggressive productivity goals. There is a substantial opportunity to grow our corporate brand products which are highly recognized by our consumers for savings and quality. We also believe that our associates, with an equity investment in the overall company, will be even more motivated in the future and fully committed to the execution of our mutual plans and programs.

Q: Shoppers Drug Mart is now KKR’s only acquisition in Canada. Why do you think they made the purchase?

A: They know that Shoppers Drug Mart is one of Canada’s leading retailers. We have powerful trademarks and outstanding locations. They praised our unique associate/owner concept. They believe we have an excellent management team and depth in management. They also believe we have substantial potential for growth.

The other thing that we like is that they are patient investors. Their history indicates that they invest for a minimum of five to seven years.

Q: How will Shoppers Drug Mart grow?

A: The new ownership is committed to 200 new or acquired stores over the next five years.

Q: What’s on the immediate agenda?

A: At the outset, it’s “business as usual.” We’re implementing our new store concept strategy with its more upscale cosmetics presentation and, of course, the rollout of our HealthWatch 2000 pharmacies. There will be 24 stores as part of this new store concept pilot by April 2000. Also, our three pilots for our Shoppers Optimum loyalty card continue to be very well received by our consumers.

The full benefits are now flowing out of Vision ’97. This was a project to centralize distribution, purchasing and accounting; leaving our associates, pharmacists and frontstore staff to focus on value-added services, especially in the pharmacy and cosmetics.

Q: Your new slogan these days is, “The best is yet to come.” Why?

A: This is an internal slogan directed towards members of our Shoppers Drug Mart family. It was intended to indicate to all of our employees and to our associates that Shoppers Drug Mart and Pharmaprix are very well positioned for the tomorrows. We have a tremendous legacy of success to build on. We believe we have the plans and programs to enable our company to continue to grow and prosper.

This investment by our new partners is based on growth. We believe that we will grow through new stores and by the acquisition of independents who want to join our family. KKR and Shoppers Drug Mart share a pride in ownership and a spirit of independence. Our corporate cultures are well matched.


Kohlberg Kravis Roberts and Company is an international private investment firm with offices in New York, California, and England. Some of its other investments include U.S. companies Safeway Stores, Evenflo and Spalding. The firm’s only previous Canadian investment, no longer active, was in Canadian General Insurance. The firm has 23 years of experience in investment buyouts, including more than 75 transactions valued at more than $95 billion (U.S.). Its 1988 hostile takeover of RJR Nabisco Inc. inspired the 1990 book and subsequent film, “Barbarians at the Gate.” The Ontario Teachers’ Pension Plan Board is responsible for the retirement income of about 221,000 teachers. With more than $60 billion in assets, the plan has averaged annual growth of 13% over the last nine years. Among the Board’s other assets: 49% ownership of Maple Leaf Sports and Entertainment (the Toronto Maple Leafs and the Toronto Raptors); 40% ownership of Maple Leaf Foods; as well as shares in Nortel, BCE and major Canadian banks. In early December, the Board bid $2.3 billion to take full ownership of Cadillac Fairview Corp., the country’s largest real estate owner. DLJ Merchant Banking is the private equity arm of Donaldson, Lufkin & Jenrette, an international investment banking firm. It was included in this investment group in part because of its current investment interest in Duane Reade, a 140-outlet drugstore chain in the New York City area. Duane Reade is known for operating highly profitable pharmacies in which the dispensary typically accounts for just 30% of total sales. The company’s strategy has been to open stores in high traffic locations where there is demand for convenience shopping. Charlesbank Capital Partners is a private investment firm based in Boston and New York that manages capital on behalf of Harvard University. Bain Capital is a private equity investment firm with four U.S. offices and one office in London, England. Its involvement in this particular investment group is attributed at least in part to its 90% ownership of the Domino’s Pizza franchise. Bain has sponsored more than 75 leveraged acquisitions and has invested in more than 115 companies.