Competitive Watch: Rite Aid To Acquire Eckerd-Brooks

CAMP HILL, Penn. -- Rite Aid announced that it has entered into a definitive agreement with the Jean Coutu Group for the drug retailer’s U.S. operations, which include both the Brooks and Eckerd banners, according to a report by Drug Store News.

The deal includes 1,858 drug stores (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. All of the stores will be re-branded Rite Aid and Rite Aid headquarters will remain here.

The stores Rite Aid will acquire are located in 18 states, with Rite Aid currently operating in 14 of the states and adding Massachusetts, Rhode Island, South Carolina and North Carolina to its national footprint. The combined fiscal 2006 revenues of Rite Aid and The Jean Coutu Group were approximately $26.8 billion, Rite Aid reported.

Upon completion of the transaction, which has been approved by the boards of directors of both companies, there will be about 5,000 Rite Aid stores in 31 states and the District of Columbia, Drug Store News said.

"Adding these stores to our company gives Rite Aid scale comparable to our major drug store competitors, and we believe this enables us to compete more effectively in a highly competitive business," said Mary Sammons, Rite Aid president, chief executive officer and now chairman. "We also look forward to bringing the Rite Aid shopping experience to four new states while, at the same time, we continue our organic growth program with our very successful 'Customer World' store design."

"With 70 percent of the acquired stores located in states where we already operate, we expect to leverage our systems, programs, best practices and executive management talent to improve profitability by achieving substantial cost savings and growing sales," she continued. "We’ll also capitalize on our leadership team's expertise in retail mergers and turnarounds and plan to make a significant financial investment to improve the acquired stores. We look forward to working with Brooks and Eckerd associates to effect a smooth transition and create a distinctive health and wellness focused shopping experience second to none."

Rite Aid reported it would remain on target with its organic new store development program with plans to open 800 to 1,000 stores over the next five years. The drug retailer expects the transaction to enable it to achieve significant cost efficiencies in the areas of merchandising, purchasing, advertising and distribution, as well as administrative expense. Net synergies are estimated to be $150 million after the first 12 months following the close, according to the report.

The Jean Coutu Group will receive $1.5 billion in cash and a 32 percent common equity interest in Rite Aid, making Jean Coutu the leading Rite Aid shareholder. Rite Aid also intends to assume $850 million of Jean Coutu's long-term debt.

Based on Rite Aid’s prior one-month average closing share price, the transaction would be valued at approximately $3.4 billion. Originally, Jean Coutu paid $2.4 billion for almost 1,540 Eckerd stores in 13 northeastern and Mid-Atlantic states.
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