Rite Aid to Buy Thrifty Chain for $2.3 Billion
Rite Aid Corp., the nation’s largest drugstore chain, said Monday it has agreed to acquire Thrifty PayLess Inc. in a $2.3-billion deal that would spread Rite Aid’s name and operations to the West Coast.
The planned merger, the latest in the rapidly consolidating drugstore industry, would create a chain with more than 3,500 stores in 26 states and sales of more than $10 billion.
All 1,007 Thrifty PayLess stores would be converted to Rite Aid stores, executives of Camp Hill, Pa.-based Rite Aid said. Rite Aid--which operates 2,809 stores in 22 Eastern states--said it plans to open additional stores in the West and remodel many of the 400 Thrifty PayLess stores in Southern California.
Consolidation in the industry is being driven by intensifying price competition and the growth of managed-care plans. Thrifty Drug Stores, formerly based in Los Angeles, sought to bolster its profitability by acquiring PayLess in 1994.
Thrifty PayLess--the largest drugstore chain in the West--would close its headquarters in Wilsonville, Ore., under the merger agreement, idling 740 employees. Rite Aid said no additional layoffs were planned.
The merger deal is unlikely to trigger opposition from antitrust regulators because Rite Aid has no presence in the 10 Western states where Thrifty PayLess operates, industry analysts said.
“This is a win-win situation for Rite Aid and Thrifty PayLess,” said Martin Grass, chairman and chief executive of Rite Aid. “Thrifty is not weak, but it was not one of the leaders in the industry. By combining . . . the shareholders should benefit.”
Rite Aid would pay 0.65 of its shares for each share of Thrifty PayLess stock. In addition, Rite Aid would assume $890 million in Thrifty PayLess debt, making the deal worth about $2.3 billion.
About 50% of the Thrifty PayLess stock is publicly traded. The largest single stake is held by Los Angeles-based Green Equity Investors, which is operated by a partnership led by Leonard Green.
Green’s partnership engineered Thrifty’s 1994 acquisition of PayLess and agreed to be acquired by Rite Aid because larger drugstore companies are competing more effectively, said Jonathan Sokoloff, a member of the partnership.
“We believe the industry will continue to consolidate, and Rite Aid is a terrific partner for Thrifty PayLess,” Sokoloff said.
Such mergers are attractive because larger drugstore companies can use their buying power to negotiate lower prices from their suppliers, said Richard Nelson, an analyst at Nesbitt Burns Securities in Chicago.
“The competitive environment is intense, and this merger makes sense because it’s a way to address profit margin concerns,” Nelson said.
Industry analysts said the deal, which is still subject to regulator and shareholder approval, was prompted by Rite Aid’s desire to increase revenue as its profit margins are squeezed by managed-care providers’ demands for lower prescription prices.
Also, drugstore chains are facing increased competition from supermarkets and discount chains such as Wal-Mart and Kmart, analysts said.
On the other hand, the consolidation of major drugstore chains is making it more difficult for independent operators.
Drugstore chains now have 39% of the $65-billion pharmacy sales market, according to Drug Store News, an industry publication. Independents have 27%, followed by mail order, 12%; discounters and other mass merchandisers, 11%; and supermarkets, 11%.
The planned merger comes months after the Federal Trade Commission prevented Rite Aid from acquiring Revco. The government concluded that the overlapping presence of the chains in some regions would have created an anti-competitive environment.
Rite Aid also announced Monday that it plans to sell about 200 drugstores in North Carolina and South Carolina to a division of J.C. Penney Co. Rite Aid said it would sell Bi-Mart, a 44-store chain controlled by Thrifty PayLess.
Rite Aid said it plans to open about 100 additional stores per year in the East and 100 in the West.
Much of that expansion will be in California, which already has 220 PayLess stores and 456 Thrifty stores. The acquisition may force the combined company to make some adjustments because Rite Aid typically has smaller stores and less-varied merchandise than Thrifty PayLess. Unlike Rite Aid, Thrifty PayLess outlets sell plants, ice cream and shoes as well as traditional drugstore items.
“These are completely different businesses. These guys are general merchandisers,” said Gary Vineberg at Merrill Lynch, referring to Thrifty PayLess.
Rite Aid would face competition in California from Sav-On, a division of Salt Lake City-based American Stores, and Walgreen Co. Nationwide. The Walgreen chain has fewer stores than Rite Aid but greater annual sales.
Rite Aid said the purchase would result in $65 million in cost savings in the first full year, largely from the elimination of duplicate management and larger purchasing power. The company would also be able to save $15 million a year in financing costs on Thrifty’s debt because Rite Aid has a superior debt rating.
Sales at Thrifty PayLess totaled about $4.7 billion in 1995. However, the company was burdened with debt and had a loss of $35 million. The company eliminated about a third of that debt by making an initial public offering of stock in April.
Thrifty shares soared $3 on Monday to close at $21.375 on the New York Stock Exchange. Rite-Aid shares fell $1.50 to $34.375 on the NYSE.
Times wire services contributed to this report.
