Penney Sells Eckerd Chain in Split Deal
CVS Corp. scrambled to the top ranks of the drugstore industry Monday by acquiring about half of J.C. Penney Co.’s Eckerd chain to push past Walgreen Co. in number of stores and challenge its rival in total revenue.
Penney announced Monday that it had sold Eckerd to CVS and Canada’s Jean Coutu Group Inc. in two deals valued at $4.53 billion.
CVS, based in Woonsocket, R.I., will get about 1,260 Eckerd stores and support facilities in Texas, Florida and several Southern states, as well as Eckerd’s pharmacy benefits management and mail order businesses, for $2.15 billion. CVS plans to rename the stores.
Jean Coutu will get 1,539 Eckerd stores in 13 Northeast and mid-Atlantic states and the chain’s Florida headquarters for $2.38 billion in cash. Those stores will continue under the Eckerd name. Jean Coutu will become North America’s fourth-largest drugstore chain by number of stores.
The sales ended months of speculation about the fate of Eckerd ever since Penney disclosed that it was selling the financially troubled chain.
The deal will make CVS the biggest U.S. drugstore operator as measured by the number of stores, with more than 5,000, leapfrogging over industry leader Walgreen, which said it had 4,336 stores as of Feb. 29.
In terms of revenue, Walgreen could retain a slim lead. It had $35.1 billion in sales in the year ended Feb. 29, compared with $26.9 billion for CVS and $7 billion in annual sales for the Eckerd stores that CVS acquired.
Shares of CVS jumped $2.57, or 7.4%, to $37.35, while Penney shares gained 7 cents to $34.90 on the New York Stock Exchange.
Penney Chairman and Chief Executive Allen Questrom said selling Eckerd would allow Penney to reduce debt and focus entirely on its 1,020 department store and catalog and Internet business, which has seen improving sales and financial results the last three years.
Tom Ryan, CVS chairman, president and CEO, said the purchase fit his company’s long-term strategy of expanding in the high-growth, Sunbelt markets. But he said the Eckerd stores were in worse shape than previous CVS acquisitions such as Revco, and he blamed poor store management.
“This is more of a turnaround situation, but we believe it’s starting to stabilize,” Ryan said.
Ryan said it would take 18 months to two years -- and up to $350,000 per store in renovations -- to lift the performance of Eckerd stores, starting in Florida. He said the Southern stores that CVS bought have seen a more dramatic drop in sales than the Northern outlets but had better locations.
The deal is subject to regulatory approval, but Penney expects it to close before the end of July.
CVS said the purchase would cost it 12 cents to 15 cents a share in earnings this year but a gain of 15 cents to 20 cents a share next year, and 25 cents to 30 cents a share in 2006.
Eckerd was dogged by problems ranging from charging too much for some items to poor locations.
It had struggled with other internal problems, such as its computer systems, while the rest of the industry was growing.
Eckerd’s same-store pharmacy sales fell 0.3% in February compared with the year before, while Walgreen stores showed an 18.6% gain in the same period and CVS pharmacy sales grew by 7.5%, according to the credit-rating service Bernard Sands.
Penney expects to generate $3.5 billion in cash from the deals after taxes and expenses, and said it could use the money to pay down debt or buy back shares of its stock.
Penney, based in Plano, Texas, had hoped to sell Eckerd for at least $6 billion, but in February it took a $450-million charge to reflect the chain’s lower value.
Questrom said Eckerd, a conglomeration of drugstore acquisitions, was hobbled by debt from a leveraged buyout in the 1990s and couldn’t afford to expand while competitors did.
