Rite Aid To Buy Two Rival Chains

Rite Aid Corp., the nation's third-largest drugstore chain, said Thursday it will purchase the U.S. Eckerd and Brooks operations of Canada's Jean Coutu Group Inc. for about $2.55 billion in cash and stock.

The deal, Rite Aid's first major acquisition since a turnaround team arrived to bring the company back from the brink of bankruptcy six years ago, will make it the largest drugstore chain operator on the East Coast, Rite Aid said. However, it will still trail Walgreen and CVS nationally.

"With this larger scale, we'll be able to compete more effectively in a very competitive business," Rite Aid President and CEO Mary Sammons told analysts in a conference call. "And we'll be in a stronger position to take advantage of the growth expected in our industry, with more people taking more prescriptions, a wave of new generics coming to market, the new Medicare prescription plan, and customers becoming more health conscious."

Rite Aid will pay $1.45 billion in cash and 250 million shares of stock valued at about $1.1 billion. The shares will give Jean Coutu a 32 percent equity stake and 30.2 percent voting power in the expanded Rite Aid, making it the company's largest shareholder. In addition, Rite Aid will assume $850 million of long-term debt as part of the deal.

Jean Coutu announced in April 2004 that it would pay $2.38 billion for 1,539 Eckerd stores being sold by the retailer J.C. Penney Co.

The Rite Aid purchase has been approved by both companies' boards, but it is subject to a review by antitrust regulators and the approval of Rite Aid shareholders.

In the conference call, Lehman Brothers analyst Meredith Adler questioned whether the deal would pass muster with antitrust regulators because of the "significant overlap" in the location of the companies' stores.

The planned acquisition includes 1,858 drugstores — 337 Brooks stores and 1,521 Eckerd stores — and six distribution centers, all located primarily on the East Coast and in the Mid-Atlantic states. The stores being acquired are located in 18 states, and 70 percent of them are in states where Rite Aid currently operates. The deal will also give it outlets in Massachusetts, Rhode Island, South Carolina and North Carolina.

Upon closing, there will be about 5,000 Rite Aid stores in 31 states and the District of Columbia, with coverage on both the East and West coasts.

CVS Corp., based in Woonsocket, R.I., is currently the nation's leader in terms of drug stores with more than 6,100. Deerfield, Ill.-based Walgreen Co., with nearly 5,300 stores, is the leader by annual revenue at $42.2 billion.

The combined fiscal 2006 revenue of Rite Aid and Jean Coutu's U.S. operations were approximately $26.8 billion.

Rite Aid plans to rebrand the all stores under the Rite Aid name.

Rite Aid, based in Camp Hill, Pa., said Sammons will continue to lead the company as president and CEO, and will also become chairman of the board. Michel Coutu, currently president of Jean Coutu Group's U.S. operations, will become co-chairman of Rite Aid and a member of the board's executive committee.

Rite Aid's current chairman, Robert G. Miller, will continue to serve as a director.

Pierre Legault, Jean Coutu Group's executive vice president, recently was appointed to run its U.S. operations. He will become Rite Aid's chief administrative officer, while Rite Aid's current senior management team remains in place.

Jean Coutu Group will name three other independent members to a 14-person Rite Aid board, including Francois J. Coutu, vice chairman of Jean Coutu; Andre Belzile, senior VP of finance and corporate affairs; and Dennis Wood, one of the independent members of Jean Coutu's board.

Rite Aid said Jean Coutu Group will continue to independently act as franchiser and distributor for its Canadian network, which currently consists of 327 franchised drugstores located in three provinces.

Rite Aid expects the deal will generate $150 million in savings in the first year after closing, and sees it adding to earnings 12 months after the close by 9 cents to 15 cents per share.

The company said it may complete the deal as early as its fiscal 2007 fourth quarter, which begins Dec. 3 and ends March 3, 2007.