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Rite Aid to Buy Brooks, Eckerd Chains for $2.6 Billion
August 24, 2006 · Reuters
Rite Aid Corp. the No. 3 U.S. drugstore chain, on Thursday said it will buy the Brooks and Eckerd drugstore chains from Canada's Jean Coutu Group Inc. for about $2.6 billion in cash and stock.
Rite Aid's shares initially fell 8 percent in early New York Stock Exchange trading on the news.
The deal comes just two years after Jean Coutu purchased the Eckerd stores to become North America's fourth-largest drugstore chain.
But Jean Coutu borrowed $2.55 billion to finance the Eckerd deal, leaving it with scant financial resources to upgrade stores and improve customer service, analysts said.
As a result, Eckerd lost marketshare and the assets floundered amid intense competition in the drugstore chain market, analysts said.
Jean Coutu "underestimated the challenges of the U.S. market," said one retail investment banker who declined to be named. "This gives them a graceful exit and lets them cut off a sick asset before it hurts the whole company."
The deal will give Rite Aid 5,177 stores, making it the largest drugstore chain on the U.S. East Coast and a closer rival to the largest U.S. drugstore chains Walgreen Co. and CVS Corp.
Rite Aid and the stores being acquired had combined fiscal 2006 revenues of about $26.8 billion. It plans to convert the 1,521 Eckerd and 337 Brooks stores to the Rite Aid name.
The deal will allow Rite Aid to expand into four new states: Massachusetts, Rhode Island, South Carolina and North Carolina.
Under terms of the deal, Jean Coutu will receive $1.45 billion in cash, plus 250 million shares of Rite Aid common stock worth about $1.18 billion as of Wednesday's close. Rite Aid will also assume $850 million of Coutu debt.
JEAN COUTU EXITS TOUGH MARKET
The deal gives Jean Coutu, which will remain an independent franchiser and distributor in Canada, where it has 327 franchised stores, a 32 percent equity stake in Rite Aid.
Michel Coutu, currently president of Jean Coutu's U.S. operations, will become co-chairman of Rite Aid's board. The Canadian company also will name three other directors to a 14-person Rite Aid Board.
Jean Coutu struggled to integrate Eckerd's inventory and supply-chain systems, and failed to respond quickly to new competitors in its markets, analysts said.
Sales at Jean Coutu's U.S. stores open at least a year rose 2.4 percent in July, lagging a 9.7 percent gain at Walgreen and a 9.5 percent jump at CVS.
In April, the company admitted it was one year behind in integrating Eckerd. It recently said it would pump $250 million into improving the U.S. stores.
Rite Aid, which will remain based in Camp Hill, Pennsylvania, said it expects the acquisition to cut earnings 3 cents to 7 cents per share in the first year, due to integration and other expenses, and then add 9 cents to 15 cents to earnings per share 12 months after the close.
About 70 percent of the stores being acquired are located in states where Rite Aid already operates. A year after the deal closes, it expects to see about $150 million in cost savings in areas such as merchandising, purchasing, advertising, distribution and administrative expenses.
Rite Aid said the deal was approved by the boards of both companies and that closing might take place in a few months.
Financial advisers for Rite Aid were Citigroup and Rothschild, while J.P. Morgan Chase & Co. served as the adviser for Jean Coutu.
Rite Aid's shares were 24 cents lower at $4.47 and Jean Coutu added C$1.75 to C$12.71. Walgreen's stock meantime slipped 20 cents to $48.25 and CVS shares were 28 cents lower at $32.70, all in early trading.