Thrifty/Payless combination changing chain drug playing field

Drug Store News, Jan 3, 1994 by Allene Symons

LOS ANGELES -- The billion-dollar deal is expected to be finalized by the end of the first quarter of the year: PayLess Drug Stores will combine with Thrifty Drug Stores to create a formidable drug store chain ranking second largest in the United States.

The new 1,066-store entity, combining 49 Thrifty sites and 572 Payless locations, will be headed by Tim McAlear, current chief executive officer of Payless Drug--that is, if all legal hurdles are cleared for the definitive agreement struck in December between Thrifty's parent company, Los Angeles-based TCH Corp., and PayLess' corporate parent, Kmart.

Dan Seigel will remain as chief executive officer of Thrifty, while McAlear will keep his PayLess title until the transaction closes before the end of March, at which time McAlear will become chief executive of the combined chain.

Seigel is expected to remain with Thrifty in a top position, according to Jon Sokoloff, general partner with Leonard Green & Partners, the controlling stockholders of TCH Corp.

Since 1990, Seigel has been with Thrifty; he held the post of chief financial officer and president before being named chief executive officer last spring.

On other management changes, Sokoloff said: "We're going to spend a lot of time to come up with the strongest management team for the combined companies."

The name of the entity is TCH Corp.," he said, adding that McAlear will be in charge of the Payless and Thrifty drug chains and Bi-Mart, a 41-store discount membership drug and general merchandise chain. Bi-Mart will be handled as a separate stand-alone business, he added.

According to Sokoloff, no decision has yet been made regarding store closings or headquarters location.

Sales for the combined chain are projected to be $4.7 billion in calendar 1994. This figure does not reflect store closings, according to Sokoloff, who explained that an erroneous and overly-high 1993 estimate of $5.9 billion was previously reported.

Future downsizing?

After the Thrifty/PayLess transaction is complete, a downsizing move is inevitable, say some retail analysts, including John Golish of Arthur Andersen in Los Angeles: "No question--whenever there is an acquisition of two companies like this, the very attractive aspect is the ability to reduce overhead and consolidate functional and organizational activities to get economies of scale."

The headquarters may not necessarily move to either Wilsonville, Ore. or Los Angeles, although many industry observers are betting on Oregon.

When asked about plans for TCH headquarters, Sokoloff would only say: "We are reviewing the best way to run the company in the most profitable fashion."

Golish of Arthur Andersen notes that in this era of "transparent overhead functions," entire departments can be moved or functions can be handled remotely. For example, Price Club's merger with Costco reportedly resulted in moving buying functions to Costco's turf in Kirkland, Wash., and accounting to San Diego, home of Price Club.

Thrifty Corp.'s Los Angeles headquarters became a cause celebre last year when it was rumored that the chain would move its offices from troubled downtown Los Angeles to adjacent Orange County. Thrifty stated that its headquarters would remain in Los Angeles, and the decision received praise and regional press attention, a public relations plus that Thrifty wouldn't find easy to back out of.

After the dust settles, will the two-chain marriage result in separate names, a hyphenated handle or a single chain?

Thrifty and PayLess are expected to operate under separate names for maximum marketing advantage and to reduce the cost of physical plant, signage and decor changes. In California, Thrifty has broader recognition than PayLess. In 11 other western states where PayLess has locations, Thrifty is unknown or has exited the market in recent years.

Analysts and industry observers note that the combined chain must rectify head-to-head competition between Thrifty and PayLess in California. Here the combined drug chain is expected to undergo major compression.

In Southern California, streamlining is inevitable in an overstored market plagued by a weak economy and jammed with powerful competitors, ranging from American Stores' Sav-on Drug/Lucky Food & Drug to Smith's and Longs, to a growing number of Wal-Mart sites and specialty membership clubs.

In the northern half of the state, where the economy is healthier than in Southern California, competition against Longs and fast-expanding Walgreens suggests a strategy where either PayLess or Thrifty should mount a focused market-share campaign, observers say.

In Hawaii and the Pacific Northwest, PayLess recently celebrated the conversion of Pay 'n Save stores acquired from Thrifty Corp. last year--and now they're back! Having recently seen Pay 'n Save signs changed to PayLess, consumers, at the very least, would be confused to see another chain name change so soon in these markets.

There are two contingencies to the closing of the Thrifty/PayLess deal: raising of financing and receipt of approval of the Federal Trade Commission, notes Sokoloff. Terms of the deal include $592 million in cash, assumption or refinancing of $170 million of debt and $100 million in securities and common stock representing 47 percent minority interest in the equity of TCH.