Loblaw looks to become ‘pure-play’ retailer

Loblaw Cos. is sharpening its strategic focus as Canada’s largest food and drug retailer.

Under a reorganization with parent company George Weston Ltd. (GWL), Loblaw plans to spin out its 61.6% interest in the Choice Properties Real Estate Investment Trust (REIT). With the move, Loblaw won’t retain any equity interest in the REIT and will trade as a “pure-play” food and pharmacy retail stock, the companies said late Tuesday.

"Over the past few years, the strategies of Loblaw and Choice Properties have diverged. Loblaw is focused on strengthening its core retail business and growing in areas such as digital, health care, payments and rewards, while Choice Properties is focused on mixed-use development and investments in diversified real estate asset classes," Loblaw Cos. President Sarah Davis said in a statement. "Our retail store network continues to be a key competitive advantage for us, but we don't see ownership of real estate as core to our strategy going forward."

Loblaw operates more than 1,050 supermarkets, including about 500 in-store pharmacies, plus nearly 1,400 Shoppers Drug Mart and Pharmaprix drug stores. The company also provides the President’s Choice (grocery), no name (food and household products) and Life Brand (health and wellness) private labels; PC Financial services; Joe Fresh fashion and apparel brand; and the PC Optimum customer loyalty program.

Related:For Loblaws, tech investments begin to pay off

GWL’s operating units are Loblaw Cos. and Weston Foods, a leading maker of fresh and frozen baked goods in North America.  

According to Richard Dufresne, president and CFO of George Weston Ltd., the spinout will optimize the ownership of Choice Properties within GWL, whereas currently Loblaw shareholders and GWL indirectly own the REIT through Loblaw.

"The transaction will make GWL financially stronger, give it more investment flexibility and, as a result, provide it with a much stronger and more compelling investment thesis," Dufresne stated. "GWL is well-positioned to provide long-term support and capital for Choice Properties' growth and diversification plans. The reorganization will better position Choice Properties with GWL as an aligned majority unitholder, while preserving the important, ongoing relationship between Choice Properties and Loblaw."

Through the proposed spinout, Loblaw common shareholders (other than GWL) will receive 0.135 of a GWL common share per Loblaw share, and GWL will receive Loblaw's 61.6% interest in Choice Properties. GWL would own 65.4% of Choice Properties directly, and Loblaw shareholders would own 16.8% of the GWL common shares outstanding when the transaction closes. Loblaw would have no ownership in Choice Properties.

Related:Pharmaprix brings fresh food to the drugstore

The spinout will require the approval of at least two-thirds of Loblaw shareholders, who will vote on the plan at a special meeting in October.

“We believe the strategic benefits of the spinout will strengthen both Loblaw and Choice Properties, which will then flow through to GWL. Essentially, what is good for Loblaw and Choice Properties will be good for GWL,” Galen Weston, chairman and CEO of Loblaw Cos and George Weston Ltd., said in a conference call on the planned spinout. “After the reorganization, George Weston Ltd. will be a stronger, more strategic company with a three-pillar portfolio: retail, food and real estate. This will provide George Weston with greater flexibility, stability and financial flexibility to actively support and invest in these businesses and also to evaluate and consider opportunities in new areas.”

Pending shareholder and regulatory approvals and other customary closing conditions, the transaction is expected to be finalized in the fourth quarter. The Loblaw and GWL boards have unanimously approved the plan.

“Loblaw's strategy is focused on enhancing our core retail business by leveraging our strong retail market position, utilizing our data analytic capabilities and improving our cost structure through process and efficiencies. We are also investing in three strategic growth pillars to meet changing consumer needs and to position the company for future growth. These include the creation of a digitally enabled retail experience, a connected health care network that will empower customers to actively manage their health, and strong payments and rewards solutions. Growth from new stores and real estate expansion have become less important to our strategy,” Davis explained in the call.

She noted that Loblaw’s supermarket square footage growth has dropped in recent years, and the company now leases most of its retail sites from third parties.

“Our stores continue to be a very important part of our business. However, we do not feel that we need to own Choice Properties in order to manage our store network. We have long-term leases in place, providing us with stability going forward,” Davis said. “As a result, we think that now is an appropriate time to separate Choice from within Loblaw, positioning Loblaw as a pure-play retailer and providing clarity to our investors.”