* Offer of C$61.54 a share represents 27 percent premium
* Canadian retailers face competition from Wal-Mart, Target
* Combined company would have had C$42 bln revenue in 2012
* Competition Bureau says to review deal
By Solarina Ho and Bhaswati Mukhopadhyay
July 15 (Reuters) - Loblaw Cos Ltd, Canada's largest food retailer, announced a C$12.4 billion ($11.9 billion) deal on Monday to buy Shoppers Drug Mart Corp, the country's biggest pharmacy chain, to bulk up against intensifying competition.
News of the tie-up, Canada's biggest merger deal so far this year, sent Shoppers shares soaring 26 percent to just under the C$61.54 per share price offered by Loblaw. Loblaw shares rose more than 9 percent at one point as investors welcomed the prospect of cost savings and increased scale.
Loblaw and parent George Weston Ltd have been under increasing pressure from long-time foreign rival Wal-Mart Stores Inc, which has ramped up its grocery offerings. Newer entrant Target Corp, which offers a smaller selection of groceries, opened its first 24 Canadian stores in March and plans to have 124 stores across the country by yearend.
And local rival Empire Co Ltd last month said it was acquiring Safeway Inc's Canadian assets for $5.7 billion, cementing its position as Canada's No. 2 grocer.
"We think the deal was a long time coming ... Shoppers Drug Mart was a sitting duck," said Barry Schwartz, a portfolio manager at Baskin Financial Services, which owns some 140,000 shares of Shoppers. "I think the Empire-Safeway transaction lit a fire under Loblaws to make a deal."
Loblaw, which opened its first store in Toronto 94 years ago and now operates more than 1,000 corporate and franchised stores in Canada, is owned by Toronto's billionaire Weston family, repeatedly ranked as the country's second wealthiest.
Starting with a bakery in Toronto, the Westons' empire now includes Selfridges and Fortnum & Mason in Britain as well as upscale retailers Holt Renfrew in Canada and Brown Thomas in Ireland.
Galen Weston, Loblaw's executive chairman, told reporters he and Shoppers Drug Mart Chairman Holger Kluge brokered the cash-and-stock deal last week during a drive along a country road.
Loblaw said the acquisition would create a combined retail operation with more than C$42 billion in annual revenue. Loblaw had C$31.6 billion in revenue in 2012. Several analysts said this would make Loblaw the country's biggest retailer by revenue.
The deal would give Loblaw increased exposure to pharmaceutical sales, which are expected to benefit from the aging of Canada's population. It would also gain a foothold in the market for smaller stores serving dense urban neighborhoods.
While Loblaw has pharmacies in some of its stores, the executives said the acquisition would catapult the company into a position that would otherwise take decades to achieve.
"For me it demonstrates Loblaw's desire to really set the agenda in Canada," said Stewart Samuel, an analyst at food and grocery researcher IGD.
He estimated Wal-Mart's Canadian sales at about half the combined revenue of Loblaw and Shoppers. Wal-Mart declined to comment.
The combination is expected to yield annual cost savings of C$300 million by the third year, Loblaw said.
REGULATORS WILL SCRUTINIZE
Canada's Competition Bureau said it will review the proposal, but could not specify how long it will take. The companies expect the deal to close within six or seven months.
"We believe the Canadian retail space is as competitive - if not more so - than any place in the world," Loblaw's Weston told reporters. "You've got ... the most compelling and aggressive international retailers in mass merchandising space in Canada, growing this year at a rate that is faster than at any time in Canadian history."
Loblaw and Shoppers executives said they do not foresee having to sell substantial assets to meet regulatory requirements, and said the transaction would not significantly change market share in their food and pharmacy businesses.
"The center of gravity of Shoppers is health-related ... whereas the center of gravity at Loblaws is food and other grocery products, but there is some overlap," said Anthony Baldanza, a partner at Fasken Martineau and chairman of the law firm's antitrust and competition group. "The issues presented by the overlap should be manageable."
Loblaw's offer of C$61.54 in cash and stock represents a 27 percent premium to Shoppers Drug Mart's closing price on Friday.
Before the deal was announced, Loblaw shares had climbed about 47 percent in the past year, while Shoppers shares had risen roughly 17 percent.
Shoppers Drug Mart shareholders will own about 29 percent of the combined company. Shoppers Drug Mart will retain its name and brand and will operate as a separate division of Loblaw.
While the deal carries a substantial C$300 million break fee, Baskin's Schwartz said many U.S. pharmacy chains and retailers would now be studying whether a rival bid is feasible.
There may be interest because building a competing pharmacy chain to Shoppers from the ground up would be nearly impossible, he said.
FUNDED WITH EQUITY, DEBT
About C$5.7 billion, or 46 percent of the cost of the deal, will be covered by the issue of Loblaw shares, the companies said. George Weston Ltd, Loblaw's biggest shareholder, will buy an additional C$500 million in Loblaw shares to help finance a the deal.
The C$6.7 billion cash portion of the deal will be financed with about C$2 billion of Loblaw and Shoppers cash on hand, and more than C$4 billion in debt financing.
BofA Merrill Lynch acted as financial adviser to Loblaw, while Torys LLP was its legal counsel.
RBC Capital Markets advised Shoppers Drug Mart on the deal. Osler, Hoskin & Harcourt LLP was its legal counsel.