For Brooks-Eckerd, Rite Aid is the 'right place'

Drug Store News, Nov 6, 2006 by Antoinette Alexander

While some industry sources may view the Rite Aid acquisition of Brooks-Eckerd as a sad reminder of industry consolidation and others perhaps question the logic behind a highly leveraged company paying a premium for a chain that has its share of struggles, executives at the Jean Coutu Group see the deal as nothing short of an opportunity for growth.

"Now, more than ever, the proper resources and strategy will be essential to compete. And the right place for us at this time is with Rite Aid," Pierre Legault, Jean Coutu Group's executive vice president and board member who was recently appointed to run its U.S. operations, told attendees at the Brooks-Eckerd Management Meeting held in Philadelphia in September. "We will align ourselves for success through this partnership to face the challenges of our industry together."

Rite Aid confirmed Aug. 24 that it is acquiring all 1,858 Brooks and Eckerd stores in a deal valued at $3.4 billion. Once the deal closes, which could occur between December and March, Rite Aid will operate more than 5,000 stores and will have combined revenue of $27 billion. The Jean Coutu Group will own 32 percent of Rite Aid's shares (30.2 percent voting power).

The deal includes 337 Brooks stores, 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 company headquarters will remain in Camp Hill, Pa.

While Rite Aid will still be the No. 3 drug store retailer in the nation in store count, it catapults the retailer ahead of Wal-Mart in pharmacy volume. Wal-Mart pharmacy generates approximately $11 billion annually, compared with Rite Aid's $10.9 billion. With the Brooks-Eckerd operations, that volume grows to $16.9 billion on an annualized basis.

Before the acquisition, Rite Aid was the No. 1 or No. 2 drug store chain in 16 major markets; factoring in the Brooks-Eckerd stores, Rite Aid is the No. 1 or No. 2 in 25 major markets, according to Rite Aid data.

Rite Aid expects the transaction will enable it to achieve significant cost efficiencies in the areas of merchandising, purchasing, advertising and distribution, as well as administrative expense. Net synergy savings are estimated to be $150 million after the first 12 months following the close of the deal--an estimate that at least one analyst called "conservative."

The company said it expects the transaction to be accretive to earnings within 24 months of the close--as much as 9 cents to 15 cents per diluted share--and to dilute earnings by 3 cents to 7 cents per diluted share for the first 12 months due to the impact of integration costs and non-recurring expenses associated with the transaction.

Not only are the stores of the two companies very similar in size, but 70 percent of the Brooks-Eckerd stores are located in 14 states where Rite Aid already operates, including areas of focus, such as New York, New Jersey, Connecticut, Pennsylvania, Maryland, Delaware and Virginia. The transaction also will enable Rite Aid to enter Massachusetts, Rhode Island, North Carolina and South Carolina on a competitive basis.

Should the deal be approved by both Rite Aid shareholders and regulatory agencies, Rite Aid president and chief executive officer Mary Sammons will continue to lead the overall company and also will assume the role of chairman. Michel Coutu, president of the Jean Coutu Group's U.S. operations, will become Rite Aid co-chairman.

The Jean Coutu Group will name three other independent members to a 14-person Rite Aid board, including Francois Coutu, vice chairman of the Jean Coutu Group; Andre Belzile, senior vice president of finance and corporate affairs of the Jean Coutu Group; and Dennis Wood, one of the independent members of the Jean Coutu Group's board of directors. Rite Aid's Miller will continue to serve as a director on the Rite Aid board. The rest of Rite Aid's current senior management team will remain in place.

Once the acquisition is complete, Legault will become Rite Aid's senior executive vice president and chief administrative officer. As chief administrative officer, Legault will be responsible for finance, information technology and real estate and will be a member of the integration leadership team along with Sammons, Rite Aid chief operating officer Jim Mastrian and senior vice president of strategic business development Chris Hall.

Post closing, the organizational structure will look as follows: Two new divisions-divisions five and six--will be added, encompassing seven operating regions in all. Division five will have more than 700 stores in three regions, and division six will have more than 1,1 00 stores in four regions, as explained by Mark DeBruin, executive vice president of pharmacy for Rite Aid, during the Brooks-Eckerd Management Meeting. A regional vice president and a regional vice president of pharmacy operations will lead each region. Each region will include two human resources managers, one regional field trainer and three regional office support associates. Furthermore, each district will have one district manager, one pharmacy district manager, one loss prevention manager and one district manager assistant.