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Rite Aid agrees to buy Eckerd and Brooks stores for $2.55 billion

HARRISBURG, Pa. (AP) _ 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 and give it a larger presence in major cities such as Atlanta Philadelphia, New York and Baltimore, Rite Aid said.

But 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 for seniors, and customers becoming more health conscious.''

Rite Aid will pay $1.45 billion in cash and 250 million shares 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.

In the first year, Rite Aid plans to spend $500 million on the stores it is buying to remodel, remerchandise and convert their computer systems and signage to Rite Aid's, and add another $450 million in the following four years, Sammons said.

``Every store will be touched in that first year, and some to a greater degree than others,'' she said.

Neil Stern, a drugstore analyst and senior partner with Chicago-based retail consulting firm, McMillan Doolittle LLP, said Rite Aid needed to make the purchase if it expected to keep up with the rapidly expanding CVS and Walgreen.

He also said the deal also builds on Rite Aid's strong markets in the Northeast.

``I think they clearly have the organizational strength to do this, and I think they have the financial wherewithal, assuming they get the support from Wall Street,'' Stern said.

Rite Aid shares fell 19 cents, or 4.1 percent, to $4.49 in afternoon morning trading on the New York Stock Exchange.

Jean Coutu paid $2.38 billion for 1,539 Eckerd stores sold in 2004 by the retailer J.C. Penney Co.

The Rite Aid purchase has been approved by both companies' boards, but still requires 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.

Sammons would not speculate on how the proposed deal might fare with regulators. She also said that it was too early to say whether Rite Aid would close any stores until it does an analysis.

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 with more than 6,100 drug stores. Deerfield, Ill.-based Walgreen Co., with nearly 5,300 stores, is the leader in annual revenue at $42.2 billion.

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

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.

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

Sammons' team took the reins of Rite Aid in December 1999 after the board forced out the previous management. They found the company to be $6 billion in debt, the seriousness of which was hidden for at least two years because of a $1.6 billion accounting falsification scheme that landed several former executives behind bars.

Rite Aid expects the latest deal will generate $150 million in savings in the first year after closing, and sees it adding to earnings of 9 cents to 15 cents per share a year after the deal closes.

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