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Rite Aid to Acquire Two Rival Chains

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From the Associated Press

Seeking to keep pace with larger rivals, drugstore chain Rite Aid Corp. said Thursday that it would acquire the Eckerd and Brooks chains from their Canadian owner for about $2.6 billion in cash and stock.

With its first major acquisition since a turnaround team arrived to bring the company back from the brink of bankruptcy six years ago, Rite Aid aims to compete better with Walgreen Co. and CVS Corp., the No. 1 and 2 chains by revenue.

At the same time, Rite Aid said, the deal would make it the largest drugstore operator on the East Coast and give it a larger presence in major cities such as Atlanta, Philadelphia, New York and Baltimore.

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“It accelerates so quickly our growth strategy,” Rite Aid Chief Executive Mary Sammons said in a telephone interview. “These are good stores in good locations.... In terms of getting into the neighborhood, being where the customer is, you really want to have the scale that our leaders in the drugstore channel have.”

Camp Hill, Pa.-based Rite Aid would pay $1.45 billion in cash and 250 million shares valued at about $1.1 billion to Jean Coutu Group Inc., assume $850 million of long-term debt.

The deal would make the Canadian company Rite Aid’s biggest shareholder, with a 32% equity stake and 30.2% voting power.

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In the first year after acquiring the Eckerd and Brooks stores, Rite Aid plans to spend $500 million to remodel and remerchandise them and to convert their computer systems and signs to Rite Aid’s, plus $450 million in the following four years, Sammons said.

Rite Aid, the No. 3 drugstore chain, needs to make the purchase to keep up with its rapidly expanding rivals, said Neil Stern, a drugstore analyst and senior partner with Chicago-based retail consulting firm McMillan Doolittle.

The deal has been approved by both companies’ boards but requires a review by antitrust regulators and the approval of Rite Aid shareholders.

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The planned acquisition covers 1,858 drugstores -- 1,521 Eckerd and 337 Brooks locations -- and six distribution centers in 18 states. About 70% of the stores being acquired are in states where Rite Aid already operates.

The deal would give Rite Aid a total of 5,000 stores in 31 states and Washington, D.C.

Sammons would add chairwoman to her duties, and Michel Coutu, president of Jean Coutu’s U.S. operations, would become Rite Aid’s co-chairman.

The company’s current chairman, Robert G. Miller, would continue to serve as a Rite Aid director.

Rite Aid expects the deal to generate $150 million in savings and sees it boosting its earnings by 9 cents to 15 cents a share in the year after the transaction closes, which it is expected to do as early as Rite Aid’s fiscal fourth quarter, which ends March 3.

Shares of Rite Aid fell 32 cents, or 6.8%, to $4.36.

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