Rite Aid to Acquire Eckerd, Brooks Chains

Rite Aid to Acquire Eckerd, Brooks Chains

Rite Aid to Acquire
Eckerd, Brooks Chains

Rite Aid Corp., finding its footing several years after a major accounting scandal, confirmed a deal to purchase the Eckerd and Brooks drugstore chains from Jean Coutu Group (PJC) Inc. for about $3.4 billion in cash and stock.

The deal will add about 1,800 stores to Rite Aid's existing 3,300 locations, boosting its efforts to catch up to larger U.S. drugstore rivals Walgreen Co. and CVS Corp. It also would increase Rite Aid's clout along the East Coast, where it already has its strongest markets.

Under the terms of the deal, Rite Aid plans to pay $1.45 billion in cash and the rest in stock. Jean Coutu Group will own about 32% of Rite Aid following the transaction, which also must pass government clearances.

Jean Coutu Group has owned Eckerd for only about two years, after its $2.38 billion purchase of 1,540 stores from J.C. Penney Co. in 2004. But it had trouble integrating Eckerd with its Brooks chain. (CVS purchased a separate 1,260 Eckerd stores from J.C. Penney.) Late last year, Jean Coutu, co-founder of the company, wrested control from his son to try to right the business.

Earlier this month, Quebec-based Jean Coutu Group said it would spend about $58 million in the coming year to renovate its U.S. drugstores, but it wouldn't comment at that time on analysts' predictions that it would sell some locations to reduce its debt.

Rite Aid, based in Camp Hill, Pa., reported sales of $17.3 billion in its fiscal year ended Feb. 26. Walgreen is the nation's largest drugstore chain by revenue, with $42.2 billion in its most recent fiscal year, while CVS is second with $37.0 billion -- but all three chains are racing to grow.

In June, Walgreen agreed to buy the Happy Harry's chain of 76 drugstores, marking Walgreen's largest acquisition since 1986. Walgreen also has been making overtures to purchase independent drugstores. CVS, meanwhile, is digesting its recent acquisition of 701 Sav-On and Osco drugstores from Albertson's Inc.

Over the past few years, Rite Aid has been rebounding from an accounting scandal in which it admitted that it overstated profits by more than $1 billion from 1997 to 1999. The company said it committed a host of wrongs, including manipulating costs and hiding depreciation expenses. Rite Aid's former chairman and chief executive, Martin L. Grass, is serving a seven-year prison sentence for his role in the deception.

Rite Aid's recovery has been bumpy. While its sales have been rising recently, profits have been erratic, it remains laden with debt, and efforts to expand in its existing markets have been costly. In its fiscal first quarter, net income fell 67%, as expenses to open new stores more than offset sales growth.

Word of the potential deal came after the close of New York Stock Exchange composite trading yesterday, in which shares of Rite Aid rose 32 cents, or 7.3%, to $4.68. In after-hours trading, shares rose three cents to $4.71. In Toronto, class A shares of Jean Coutu Group were up 39 Canadian cents, or 3.7%, to C$10.95 (US$9.82).

In the fiscal year ended March 4, Rite Aid reported net income of $1.27 billion, or $1.89 a diluted share, on revenue of $17.3 billion.

Jean Coutu Group reported net earnings for the fiscal year ended May 27 of $103.8 million, or 40 cents a share, on revenue of $11.14 billion.