W14250
Teaching Note
LOBLAW AND SHOPPERS DRUG MART
SYNOPSIS
In mid-2013, Galen G. Weston Jr., executive chairman of Loblaw Companies Ltd. (Loblaw), was
considering whether it was in his company’s best interest to acquire Shoppers Drug Mart (Shoppers).
With the recent spin-off of some of Loblaw’s real estate assets and with Shoppers’ shares currently
trading at an historically attractive valuation, this might be a good time to act on what had been perceived
for a number of years as an attractive merger option. The total potential synergies in the event of a
Loblaw/Shoppers merger were estimated to be in excess of $300 million per year.
Throughout 2013, there were a number of developments that affected the competitive landscape within
the supermarket and grocery store industry in Canada. The parent company of competitor Sobeys had
acquired another chain, Canada Safeways Ltd., and Loblaw itself underwent an organizational change. In
December 2012, it announced a proposal to create a real estate investment trust (REIT) to which it would
initially transfer approximately 75 per cent of its substantial real estate holdings. Management believed
that the REIT transaction could unlock value for Loblaw shareholders.
With Loblaw shares trading near a six-year high, there was now the attractive opportunity to use the
shares as a currency to make an acquisition. Was this the appropriate time to make an offer to acquire
Shoppers? Did the acquisition make strategic sense? If so, what price would Loblaw pay for the
acquisition?
TEACHING OBJECTIVES
This case is suitable for an undergraduate or masters level course to demonstrate the connection between
accounting and finance concepts. It can be used as a capstone case in a financial accounting course as it
covers key financial fundamental concepts such as understanding the management discussion and analysis
(MD&A) section of financial statements, reading financial statement notes and analyzing and valuing a
potential acquisition target. In addition to these concepts, the case also introduces key acquisition
, Page 2 8B14B003
considerations including synergies, sources of financing and a change in ownership structure post-
acquisition.
There is a significant amount of content in the case, which is meant to be taught over two days. It also
assumes that students have had at least one class focusing solely on the Loblaw financial statements.
OBJECTIVES OF DAY 1
The focus of Day 1 will be to understand the differences and similarities between the two companies from
a financial statement and operational perspective.
1. Conceptually understand the purpose of the MD&A.
2. Identify key accounting policies.
3. Compare and contrast two businesses via ratio analysis and accounting policy analysis.
SUGGESTED ASSIGNMENT QUESTIONS DAY 1
1. What is the purpose of the MD&A? What sort of information is provided in this document that is not
already disclosed in the financial statements that follow the MD&A? Why is a separate document
required? That is, why not simply include the additional information in the financial statements?
2. What are the key accounting policies at Shoppers? How, if at all, do they differ from Loblaw? What
is the impact, if any, on the ratios of the two companies of significant accounting policy differences?
3. How has Shoppers performed relative to Loblaw? How has the front of store performed relative to the
prescription business?
DISCUSSION DAY 1
1. What is to be the purpose of the MD&A? What sort of information is provided in this document
that is not already disclosed in the financial statements that follow the MD&A? Why is a
separate document required? That is, why not simply include the additional information in the
financial statements?
A good starting point for the case is to ask the class about the purpose of the MD&A. focusing on
Shoppers.
The Canadian Institute of Chartered Accountants (CICA) provides guidance on preparation and disclosure
of the MD&A 1. The six principles in that guidance state that the MD&A should:
1. allow readers to view the entity through management’s eyes;
2. supplement and complement the information in the financial statements;
3. be complete, fair and balanced, and provide information that is material to the decision-making need
of users;
4. have a forward-looking orientation;
1
www.cica.ca/publications/list-of-publications/manual/item29637.pdf, accessed June 25, 2014.
Teaching Note
LOBLAW AND SHOPPERS DRUG MART
SYNOPSIS
In mid-2013, Galen G. Weston Jr., executive chairman of Loblaw Companies Ltd. (Loblaw), was
considering whether it was in his company’s best interest to acquire Shoppers Drug Mart (Shoppers).
With the recent spin-off of some of Loblaw’s real estate assets and with Shoppers’ shares currently
trading at an historically attractive valuation, this might be a good time to act on what had been perceived
for a number of years as an attractive merger option. The total potential synergies in the event of a
Loblaw/Shoppers merger were estimated to be in excess of $300 million per year.
Throughout 2013, there were a number of developments that affected the competitive landscape within
the supermarket and grocery store industry in Canada. The parent company of competitor Sobeys had
acquired another chain, Canada Safeways Ltd., and Loblaw itself underwent an organizational change. In
December 2012, it announced a proposal to create a real estate investment trust (REIT) to which it would
initially transfer approximately 75 per cent of its substantial real estate holdings. Management believed
that the REIT transaction could unlock value for Loblaw shareholders.
With Loblaw shares trading near a six-year high, there was now the attractive opportunity to use the
shares as a currency to make an acquisition. Was this the appropriate time to make an offer to acquire
Shoppers? Did the acquisition make strategic sense? If so, what price would Loblaw pay for the
acquisition?
TEACHING OBJECTIVES
This case is suitable for an undergraduate or masters level course to demonstrate the connection between
accounting and finance concepts. It can be used as a capstone case in a financial accounting course as it
covers key financial fundamental concepts such as understanding the management discussion and analysis
(MD&A) section of financial statements, reading financial statement notes and analyzing and valuing a
potential acquisition target. In addition to these concepts, the case also introduces key acquisition
, Page 2 8B14B003
considerations including synergies, sources of financing and a change in ownership structure post-
acquisition.
There is a significant amount of content in the case, which is meant to be taught over two days. It also
assumes that students have had at least one class focusing solely on the Loblaw financial statements.
OBJECTIVES OF DAY 1
The focus of Day 1 will be to understand the differences and similarities between the two companies from
a financial statement and operational perspective.
1. Conceptually understand the purpose of the MD&A.
2. Identify key accounting policies.
3. Compare and contrast two businesses via ratio analysis and accounting policy analysis.
SUGGESTED ASSIGNMENT QUESTIONS DAY 1
1. What is the purpose of the MD&A? What sort of information is provided in this document that is not
already disclosed in the financial statements that follow the MD&A? Why is a separate document
required? That is, why not simply include the additional information in the financial statements?
2. What are the key accounting policies at Shoppers? How, if at all, do they differ from Loblaw? What
is the impact, if any, on the ratios of the two companies of significant accounting policy differences?
3. How has Shoppers performed relative to Loblaw? How has the front of store performed relative to the
prescription business?
DISCUSSION DAY 1
1. What is to be the purpose of the MD&A? What sort of information is provided in this document
that is not already disclosed in the financial statements that follow the MD&A? Why is a
separate document required? That is, why not simply include the additional information in the
financial statements?
A good starting point for the case is to ask the class about the purpose of the MD&A. focusing on
Shoppers.
The Canadian Institute of Chartered Accountants (CICA) provides guidance on preparation and disclosure
of the MD&A 1. The six principles in that guidance state that the MD&A should:
1. allow readers to view the entity through management’s eyes;
2. supplement and complement the information in the financial statements;
3. be complete, fair and balanced, and provide information that is material to the decision-making need
of users;
4. have a forward-looking orientation;
1
www.cica.ca/publications/list-of-publications/manual/item29637.pdf, accessed June 25, 2014.
