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Deal has 2 firms splitting Eckerd

The store name, a Florida presence for decades, would disappear from the state and CVS would become the nation's largest drugstore chain.

By MARK ALBRIGHT
Published April 2, 2004

J.C. Penney Co. is close to striking a deal to sell Eckerd Corp. by splitting the drugstore chain between CVS Corp. and the Canadian Jean Coutu Group.

The estimated $4.4-billion deal would break up the nation's fourth-largest drugstore chain and leapfrog CVS Corp. past Walgreen's as the nation's largest drug chain with 5,400 stores.

The Eckerd name and corporate headquarters, which houses 1,000 administrative workers in Largo, would remain intact for now under the Coutu ownership. The sale also would erase the 622-store Eckerd chain in Florida, where it has been synonymous with the pharmacy business since Jack Eckerd bought three old drugstores in the Tampa Bay area in 1952.

CVS would end up with about 1,200 stores in Texas, Louisiana and Florida and transform them into CVS/Pharmacy stores. Because CVS already owns 74 stores in Florida, including 19 in the Tampa Bay area, many duplicate locations would be closed.

Coutu, which operates a franchise network of 311 drugstores in Canada and owns the 322-store Brooks Pharmacy chain in New England, would walk away with about 1,600 Eckerd stores scattered up the East Coast.

Unknown is the fate of Eckerd Health System, the company's huge mail-order pharmacy, which analysts have suggested is worth about $700-million by itself. The business currently operates from two major facilities in Largo and Pittsburgh.

Officials from the companies confirmed to the St. Petersburg Times that a deal could be reached within days, but cautioned negotiations could break down without a signed contract.

All three companies on Thursday declined to comment publicly. But similar reports also were published by the Wall Street Journal and Reuters.

The sales would end a long, grueling and secretive bid process that has hung over Eckerd for the past six months. JCPenney, which has seen its seven-year ownership of Eckerd as a distraction that would cost too much to continue fixing, last month formally declared that it would carry Eckerd on its books as a discontinued asset. Penney also took a $1.3-billion charge against earnings in connection with selling the drugstore chain that had been accounting for 45 percent of its annual revenues.

Penney, which agreed to acquire Eckerd in November 1996 and closed on the deal in 1997, is most likely to lose money on its investment. Penney paid $3.3-billion and assumed $1-billion in debt to acquire Eckerd and combine it with its 800-store Thrift Drug chain. But Penney also bought more than 500 more stores from four other chains in New York state, Virginia and the Carolinas to create what for a while was the nation's second-largest drugstore chain.

Eckerd's declining sales and earnings have continued to deteriorate for most of the past year.

"I don't think CVS is going to be over-paying," said Mark Husson, a securities analyst with Merrill Lynch. He estimates CVS is paying about $1.6-million per store for locations that have average annual sales of $4.9-million.

Penney had been hoping to get as much as $7-billion for Eckerd, but lowered its expectations after fielding bids for the entire company earlier this year. Penney this week disclosed in an SEC filing that it decided to carry Eckerd on the books at a fair value of $4.37-billion as of Feb. 26.

"That's not necessarily what they will get for Eckerd, but they had some good clues from the earlier round of bidding about what it's currently worth," said Bernard Sosnick, a securities analyst with Oppenheimer & Co. "Once they put the money in the JCPenney treasury, it should make Penney stock more attractive."

Because Eckerd's widely known sale had been built into the company' stock price months ago, Wall Street didn't buy the argument on Thursday. JCPenney shares closed at $34.30, down 48 cents. CVS shares closed at $34.90, down 40 cents. On the Toronto Stock Exchange Coutu Group shares closed at $17.75, up 65 cents. Both CVS and Coutu had been the expected winners of Eckerd since the bidding began in October.

For CVS, Florida's older population is a crucial pharmacy marketplace in its ongoing duke-out with Walgreens. After a major building binge in the Sun Belt, Walgreens dislodged Eckerd as Florida's drugstore market share leader a few years ago. CVS needs Eckerd's real estate to mount a credible performance quickly.

Walgreens, however, does not expect to buy any of the stores CVS or Coutu sells.

"We have always grown organically rather than buying somebody else's stores," said Walgreen Co. spokeswoman Carol Hively. Walgreens, which has 4,200 stores in 44 states, is adding 450 a year and plans to have 7,000 by 2010. While CVS will have 696 stores in Florida before closing any duplicates with Eckerd, Walgreens currently has 613 stores and plans for 748 within three years.

Coutu would have to borrow deeply and possibly issue new stock to bankroll the purchase. Analysts are not sure Coutu can handle the entire acquisition without a plan to unload some markets to other drugstore chains.

"They have very strong cash flow from their Canadian stores but this deal would graft 1,600 stores with their ownership of about 300 in the United States," said Keith Howlett, a securities analyst with Desjardins Securities in Toronto. "They are excellent at planning details. But I would not be surprised if they did some short-term borrowing to finance this, then sold some places like the Carolinas to someone like Rite Aid Corp."

- Mark Albright can be reached at albright@sptimes.com or 727 893-8252.

THE ECKERD COMPANIES

ECKERD CORP.

WHAT IS IT: The nation's fourth-largest drugstore chain with revenues of $17-billion in 2003.

ORIGINS: Traces its lineage to J. Newton Eckerd's Erie, Pa., store in 1898. But the modern Eckerd really was started by his son Jack who bought three drugstores in the Tampa Bay area in 1952. It grew to the largest drugstore chain in the South.

SIZE: Eckerd has 2,800 stores in 23 states as far west as Arizona and as far north as upstate New York. About 1,200 of them are in Texas and Florida.

SIDE BUSINESS: Eckerd has Express photo shops in 2,100 stores. Eckerd Health Systems is a large mail-order pharmacy that serves managed care plans. Launched eckerd.com online pharmacy in 1999.

GOVERNANCE: Parent J.C. Penney Co. Inc. hired chairman and chief executive J. Wayne Harris, 63, a veteran supermarket executive, to lead a turnaround of the faltering chain in 2000.

CVS CORP.

WHAT IS IT: With revenues of $26.6-billion in 2003, the nation's second-largest drugstore chain.

ORIGINS: Founded in 1963 in Woonsocket, R.I., CVS stands for Consumer Value Stores. It attained $1-billion in revenues in 1985. Mercurial growth was later fueled when its parent, retailing conglomerate Melville Corp., sold all its businesses in the early 1990s, including Marshall's, the discount apparel chain, KB Toys, Thom McAn Shoes and Linens n' Things to concentrate solely on its CVS drugstore chain.

SIZE: 4,200 stores in 33 states, all of them east of the Mississippi River except for Texas, Arizona and Nevada. Moved into Florida, an Eckerd and Walgreens stronghold, in 2001 where it now has 78 stores. Last big purchase was Revco Drugs in 1997, which at the time was the biggest acquisition in U.S. drugstore history.

SIDE BUSINESS: Operates ProCare stores for customers who need complicated drug therapies. Got into the online pharmacy business with the 1999 purchase of Soma.com, which was renamed cvs.com. Operates PharmaCare Management Services for managed care.

GOVERNANCE: Chairman, president and chief executive Tom Ryan, 50, started out as a CVS pharmacist in 1978.

JEAN COUTU GROUP WHAT IS IT: Coutu (coo-two) operates the third-largest drugstore chain in Canada but gets half its revenues from its Brooks Pharmacy chain in the U.S.

SIZE: Revenues of $4.1-billion in 2003 from a network of 311 franchised stores in Quebec, New Brunswick and Ontario and Brooks, which operates 322 company-owned stores in New England and upstate New York.

ORIGINS: Founded in Montreal by pharmacist Jean Coutu in 1969, his biggest store in 1973 was the landmark Pharmacie Montreal, a discount store that was open around the clock and employed 250 people. Has a customer loyalty program that pays off in frequent flyer miles.

SIDE VENTURES: Online pharmacy jeancoutu.com, a real estate development company that builds stores and a store security company.

GOVERNANCE: Now 77, the founder still controls 55 percent of the company's stock and 92 percent of the voting shares. He turned over the CEO's job to son Francois, 48, in 2003. Another son Michel, 51, runs U.S. operations. Two daughters and a third son are among the six family members on the 16-member board. Francois may be the third-oldest son, but he got the nod as CEO largely because he is a pharmacist.

[Last modified April 2, 2004, 01:20:42]

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