Analysts say J.C. Penney Co. is likely to have to break up the Largo drugstore chain and sell the pieces to get rid of it.
By MARK ALBRIGHT
Published January 7, 2004
J.C. Penney Co. executives insist they have not decided the fate of their Eckerd drugstore chain. But the stock market and a growing number of analysts think the nation's fourth largest drugstore chain is about to be sold - most likely in pieces.
"The sale of Eckerd has already been built into JCPenney's current stock price," said John Ransom, a securities analyst with Raymond James and Associates. "Eckerd's turnaround has been a failure. The company's pretty much adrift."
At this point a sale remains all speculation, counters J.C. Penney spokesman Wynn Watkins. He ticked off the list of four options on the table: keeping Eckerd, spinning it off as a separate stock, selling the entire company, or unloading it piecemeal.
"We will make a decision about Eckerd's future by the end of the fiscal year (Jan. 30) or a little after that," he said. "But nothing else has changed."
Still, analysts say market conditions and Eckerd's continued deteriorating performance have made three of the four options more doubtful than ever. A spinoff to shareholders or initial public offering would be tough given the recent dismal performance of Eckerd, which is based in Largo. Finding a single drugstore buyer for the whole company would raise significant antitrust issues for other drugstore chains, not to mention problems with duplicate stores in some markets. That leaves the most likely choice: breaking up the company and selling the pieces.
"It's becoming pretty clear they are going to get rid of it," said Joe Bonner, analyst with Argus Research. "Eckerd has been dragging J.C. Penney's stock down for too long. But there are really only two chains capable of buying the whole company. CVS is only interested in some of it. I'd be flabbergasted if Walgreens, which is antiacquisition, even tried."
Selling Eckerd in pieces promises to be a disruptive, ugly scenario. The corporate headquarters in Largo, which now employs almost 1,000 people, could be shuttered or scaled back to a regional distribution center. Hundreds of stores in several states could be closed as unmarketable although Penney would presumably still be on the hook for the rent.
Even Eckerd's mail-order pharmacy, one of the biggest run by a drugstore chain, could end up sold to a mail-order rival.
A leading name in Tampa Bay area business since 1952 could vanish.
So far investment bankers at Credit Suisse First Boston, who are exploring the options for J.C. Penney, have found several prospects. They include financial backers for bids from CVS Corp.; the Canadian Jean Coutu Group; Rite-Aid Corp.; and Kohlberg Kravis Roberts & Co., an investment firm that controls the 844-store Shoppers Drug Mart in Canada.
No details have emerged about how the 2,761 Eckerd stores in 24 states would be sold.
A consensus among analysts, however, sees CVS ending up with about a third of the Eckerd stores including most, if not all, of the 1,133 in Florida, Texas and Louisiana. CVS has been making a major push into Florida, although it has only about 66 stores in the state so far. The 612 Eckerd stores would clinch its standing as the state's second-ranked drugstore chain behind Walgreen.
Coutu, which includes KKR as one of its financial partners, is seen as the likely winner of hundreds of Eckerd's stores in the Northeast, where Coutu operates the 322-store Brooks Pharmacy chain. Rite Aid and other smaller chains are seen as looking for expansion opportunities in individual markets.
"Selling Eckerd would have lots of moving parts because it appears Penney won't be able to sell it whole," said Bill Dreher, a securities analyst with Deutsche bank. "But it is quite clear Penney wants to get rid of Eckerd."
Of course, a key question is how much Penney can get for Eckerd. Analysts have suggested a range of $2-billion to as much as $5.5-billion, and some don't think Eckerd will fetch enough to make it worth the trouble. Penney's current stock price (its shares closed Tuesday at $26.47, up 9 cents) envisions Eckerd going for about $3.5-billion, a little more than Penney's paid for it eight years ago.
Some analysts see a more robust market for drugstores than previously thought after Oak Hill Partners recently paid $700-million for the 239-store Duane Reade chain in New York City.
Analyst Bruce Missett of Morgan Stanley this week upgraded J.C. Penney stock because he thinks the Duane Reade sales means Penney will get $3.8-billion for Eckerd. Penney's drawn out decision-making process has taken a toll at the company's Largo headquarters. All but senior managers have been in the dark about the decision-making process that's been centered at Penney headquarters in Plano, Texas. Employees in more than 2,700 Eckerd stores have been told nothing except what Penney has said in news releases and SEC filings.
Penney bought Eckerd in 1996 to smooth out the ups and downs of its then-troubled department store business. It worked for a while. But in the past two years Eckerd, which accounts for about half of Penney's revenues, has had a difficult time. One reason was that the chain opened virtually no new stores for five years. That gave rivals Walgreen and CVS time to open hundreds of new stores in Eckerd's traditional strongholds in Texas and Florida.
Meanwhile Wal-Mart, which operates the nation's fifth largest retail pharmacy business, elbowed its way into more market share in Sun Belt states where Eckerd has long been a dominant player.
Wayne Harris, Eckerd's chairman and chief executive, has taken several steps to shore up Eckerd's shortcomings in store-building, service and technology. But in listing Harris as one of its six worst managers of 2003, Business Week this week termed his efforts "back to square one."
Said Bill Dreher of Deutsche Bank: "If your health insurance says you can get prescriptions from either Eckerd or Wal-Mart, where are you going to go? To Eckerd where you can pick up other convenience items at the front end of the store at premium prices - or Wal-Mart where you get the same things a lot cheaper?"
