Rite Aid could pick off piece of Brooks-Eckerd

Drug Store News,  June 26, 2006  

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NEW YORK -- A Credit Suisse analyst speculated earlier this month there was a 1-in-4 chance that Rite Aid will pick off at least a portion of the Eckerd stores presently owned by Brooks Pharmacy, should its parent company, Quebec-based Jean Coutu Group, decide to put any of the stores up for sale.

"We believe Rite Aid would seek to acquire a large number of Eckerd stores in the Mid-Atlantic and Southeast if Jean Coutu decides to divest assets," noted Ed Kelly, Credit Suisse analyst. "Jean Coutu's integration issues and heavy debt load, Rite Aid s desire to participate in industry consolidation, and recent market speculation support the possibility of a deal. We see the probability of a deal at about 25 percent now, with the likelihood increasing if Coutu's financial situation worsens, he said. 'We view this deal as positive for Rite Aid despite the added risk."

Indeed, it is no secret that the Jean Coutu Group has had a difficult time digesting Eckerd, and it may make sense for them to divest the Mid-Atlantic and Southeast locations--some 729 stores--to focus on their Brooks/Eckerd New England base. Kelly estimated those Eckerd stores generated $3.4 billion in revenue, contributing $76 million to EBITDA. We estimate the acquisition value of these stores at $700 to 800 million, Kelly said, which is about 10 times EBITDA and $1 million per store.

For the right price, it almost looks too good to be true for Rite Aid. Out of 46 markets in 10 states, Brooks-Eckerd currently commands the No. 1 or No. 2 market share in 20 markets. In every one of those markets, either CVS or Walgreens are the chief competitors.

Rite Aid overlaps with Eckerd in only 14 of its 46 major markets in the Mid-Atlantic and Southeast, Kelly noted. "Rite Aid also operates three distribution centers in these regions, which should result in meaningful synergies in distribution," he said.

"We believe interest from other players in the industry is low," Kelly said--CVS has swallowed two significant acquisitions in as many years and Walgreens just pocketed some 75 stores in Delaware, which happens to be the largest acquisition in recent history for the organically grown company.

Kelly expressed confidence that Rite Aid would be able to turn around the southern Eckerd operations and that it would not negatively impact the chain s debt ratio in the short term. "We project Rite Aid s adjusted debt to EBITDA ratio at 5.2 following this deal, versus 5.1 currently."

Rite Aid had no comment on the proposed acquisition. "We don t comment on rumors or speculations about acquisitions," noted Karen Rugen, senior vice president of corporate communications with Rite Aid.

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