NEW YORK (

The Deal

) -- Canadian grocery giant

Loblaw Cos. Ltd

said Monday it would acquire

Shoppers Drug Mart Corp.

in a C$12.4 billion ($11.9 billion) deal designed to fortify the company against increasing competition from U.S. rivals.

Terms of the deal call for Brampton, Ontario-based Loblaw to pay C$33.18 in cash and 0.5965 shares for total consideration of C$61.54 per share, a premium of 27% to the target's Friday close on the Toronto Stock Exchange. Shoppers stockholders will have the option to take cash or stock, with the maximum amount of cash to be paid by Loblaw capped at about C$6.7 billion.

Post-deal Shoppers holders would own about 29% of the combined company, which would generate about C$1 billion in annual free cash flow, C$3 billion in EBITDA and C$42 billion in annual sales. The companies said that combined they would be better able to compete against U.S. retail giants such as

Target Corp.

(TGT) - Get Report

and

Wal-Mart Stores Inc.

(WMT) - Get Report

, which are increasingly encroaching upon Canadian territory.

Toronto-based Shoppers operates 1,242 retail drugstore locations under the Shoppers Drug Mart and Pharmaprix brands, and also licenses or owns 57 medical clinic pharmacies and owns 52 home healthcare stores. Loblaw already ranks as the largest food retailer in Canada, with more than 1,000 stores and 134,000 full and part-time employees.

The deal "changes the retail landscape in Canada," Loblaw CEO Galen G. Weston said in a statement, adding that the deal should "strengthen our position in the increasingly competitive marketplace." Shoppers would retain its brand and boost Loblaw's footprint in the small-urban store sector."This combination creates a compelling new blueprint for the future, positioning us to capitalize on important trends in society, from the emphasis on health, wellness and nutrition, to the imperatives of value and convenience," Weston said.The deal comes just a week after a large U.S. grocery deal,

Kroger Co.'s

(KR) - Get Report

$2.44 billion purchase of

Harris Teeter Supermarkets Inc.

(HTSI)

Loblaw said it would finance the deal with cash on hand and committed bank facilities including a C$3.5 billion term loan and C$1.6 billion bridge loan fully underwritten by

BofA Merrill Lynch

,

Pierce, Fenner & Smith Inc.

, Bank of America NA, Canada branch and

Bank of America NA

(BAC) - Get Report

.

George Weston Ltd.

, Loblaw's controlling shareholder, has entered into a voting agreement to support the deal and will buy $500 million worth of common shares to help finance the purchase.

The company said it expects to shave C$300 million in annual costs within three years of closing, and said free cash flow should help it to quickly pay down its debts and maintain its current rating.

Bank of America Merrill Lynch,

Torys LLP

and

Borden Ladner Gervais LLP

are advising Loblaw. Shoppers Drug Mart received financial advice from

RBC Capital Markets LLC

and legal counsel from

Osler, Hoskin & Harcourt LLP

.

Written by Lou Whiteman