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Eckerd sale to Rite Aid marks end of an era

Two years after buying 1,521 U.S. stores, Canada's Coutu Group agrees to sell.

By MARK ALBRIGHT
Published August 25, 2006

The sun will set on the Eckerd drugstore brand after a Canadian chain on Thursday agreed to sell its U.S. operations to Rite Aid Corp.

Unable to turn around 1,521 Eckerd stores acquired in the 2004 bust-up of Largo-based Eckerd Corp., the Montreal-based Jean Coutu Group will emerge debt-free and holding 32 percent of Rite Aid in the $3.4-billion cash, stock and assumed-debt sale.

All Eckerd stores from Georgia north to upstate New York, along with 337 of Coutu's Brooks Pharmacy stores in New England will be converted to Rite Aid stores.

That will signal a quiet end to the Eckerd name that has been a familiar pharmacy brand - and in many places a synonym for the corner drugstore - for more than a century.

Once the deal is closed in early 2007, Rite Aid will be back in the race to be the nation's largest drugstore chain behind Walgreen Co. and CVS Corp. with more than 5,000 stores in 31 states and the District of Columbia.

It remains to be seen how many of those stores will remain open, however. Analysts see lots of market overlap. Federal antitrust regulators have to review which metro markets must be divested. Both companies expect to carve $150-million in annual costs from the combined companies.

The decision to sell came after Jean Coutu's ambitious plans for the United States ran out of gas. Mediocre sales gains continued despite new management and merchandise. Earlier this year, the chain's feisty 79-year-old patriarch, chairman Jean Coutu, lurched out of semiretirement to replace his son as chief executive officer and hire an outsider to guide his younger son, who runs the U.S. stores.

He bristled at analyst characterizations of his ill-fated U.S. venture.

"I didn't come back. I was here all along. I just decided to reappear," he said. "I wouldn't consider this a disappointment. We had a plan B. If this was a disaster, I would like to be part of more disasters like this."

While shareholders lost about $1-billion in market capitalization on the stock roller coaster, the company will record a $140-million loss on the Eckerd transaction, depending on the financing costs, exchange rates and the stock prices at closing.

"And we end up debt-free and the biggest single shareholder in the third-biggest chain in North America," said Coutu, whose Canadian chain is no longer linked to the troubles of the U.S. operation.

Coutu will get to name four of the 14 Rite Aid directors. Rite Aid is paying $2.3-billion for Coutu's U.S. operation, $1.45-billion will go to Coutu to pay down the debt it incurred to buy Eckerd. Plus, Coutu gets 250-million shares of Rite Aid currently worth $1.1-billion. On top of all that, Rite Aid assumes $850-million in Coutu debt.

For Rite Aid of Camp Hill, Pa., it was the first acquisition since six of its top executives were convicted of crimes in an accounting scandal in 2000.

John Heinbockel, an analyst with Goldman Sachs, downgraded Rite Aid stock after the purchase, calling the company an "underperformer" and "already highly leveraged" with debt. Rite Aid shares dropped 7 percent to close at $4.36, down 32 cents.

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

[Last modified August 24, 2006, 23:43:55]