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THE CUTTING EDGE

J.C. Penney to Acquire Eckerd for $2.5 Billion

November 04, 1996|From Times Wire Services

Department store giant J.C. Penney Co. moved to add to its drugstore business Sunday with an agreement to buy Eckerd Corp. for about $2.59 billion in cash and stock, a move that would make J.C. Penney the nation's No. 2 drug store operator.

With the acquisition of Eckerd's 1,724 stores, which had sales of more than $5 billion last year, J.C. Penney's Thrift Drug unit would operate about 2,800 drugstores with nearly $10 billion in annual sales. Earnings from drugstores would represent about a third of J.C. Penney's total sales.

The acquisition would combine Thrift Drug's strength in Pennsylvania and New York, where it operates nearly 600 drugstores, with Eckerd's dominance in the Sun Belt.

J.C. Penney announced the purchase of 200 Rite Aid stores Oct. 14, after the purchase of the Fay's drugstore chain in the Northeast and the acquisition of the 97-store Kerr Drug chain in January 1995.

"Our acquisition of Eckerd represents a major strategic step which creates one of the nation's premier drugstore businesses," said James E. Oesterreicher, J.C. Penney's chief executive.

He said J.C. Penney would probably put the Eckerd's name on all its drugstores.

"We think there's a large advantage to utilizing the equity that's in the Eckerd name," he said.

A decision on the stores' names would be made in the first quarter of 1997, when the deal is expected to close, he said.

Plano, Texas-based J.C. Penney said the proposed transaction already had been approved by the boards of both companies.

The Eckerd deal makes sense as Penney tries to increase revenue despite slow growth in the department store sector, said Stephen Latz, a retail industry analyst at the A.G. Edwards securities firm in St. Louis.

After Dayton Hudson--which has Target, Mervyn's, Marshall Field's and other chains--rebuffed Penney's $6.8-billion merger proposal earlier this year, Penney apparently decided to take another tack, he said.

"I think when they didn't make the Dayton Hudson deal, they said, 'We've got this Thrift Drug, it's making money, it's got growth potential,' " Latz said.

Increasing the share of sales from its retail drug subsidiary means Penney's bottom line will see a bigger impact, he said.

The deal is the latest in a consolidation in the drugstore business. Companies are trying to expand markets and cut costs as health maintenance organizations demand deep breaks on drug prices.

Last month, Rite Aid Corp., the nation's largest drugstore chain, announced it was acquiring West Coast competitor Thrifty PayLess Inc. for about $1.4 billion in stock. Last week, No. 2 Revco D.S. Inc. reached agreement to purchase Big B Inc. for $380 million in cash.

Earlier this year, Rite Aid tried to acquire Revco but gave up amid opposition from the Federal Trade Commission.

Penney said it is offering $35 in cash for each of 37.1 million Eckerd shares, about 50.1% of Largo, Fla.-based Eckerd.

Penney would then pay 0.6604 share of its stock, worth about $35 a share, for each of the remaining 36.9 million shares of Eckerd. Penney's board has also authorized the company to repurchase up to 15 million of its shares before the stock swap.

The offer is a 21% premium over Eckerd's closing price on Friday of $28.875 a share on the New York Stock Exchange, where Penney closed at $53 a share.

Although it has already been approved by the boards of both companies, the transaction is subject to shareholder and regulator approvals.

Penney said it would merge its Thrift Drug subsidiary with Eckerd. Frank A. Newman, president and chief executive of Eckerd, would become chief executive of the combined companies, reporting directly to Oesterreicher.

"We considered a number of strategic alternatives, and the management and board of directors of Eckerd unanimously concluded that this transaction . . . is best for Eckerd's shareholders, employees and customers," Newman said.

He said there would be some store closings because of overlapping territories, but that the two chains are generally geographically complementary.

David McKay, Penney's chief financial officer, said he expects "some potential modest" reduction in earnings in the fiscal year ending in January 1998 as the company absorbs some transition costs.

Cost reductions and increased revenue of up to $100 million are expected to boost Penney's earnings in the 12 months after that, McKay said.

Eckerd, which also includes 542 Express Photo labs in 11 states, was attractive because of its sales and earnings growth, said Oesterreicher, who also cited the company's "strong presence and brand name recognition in markets with large and growing populations."

He also hinted that Eckerd stores may take on a new look.

"J.C. Penney brings merchandising opportunities and operational expertise which we believe will add further value to the front end of the drugstore," Oesterreicher said.

The J.C. Penney catalog counters now in Thrift Drug stores could be added to Eckerd stores, he said. Other additions could include more women's hosiery and children's novelty goods like those Penney sells, Oesterreicher said.

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