A New Drugstore King Is Born

J.C. Penney Co. said Monday it has sold its financially troubled Eckerd chain of 2,800 drugstores to CVS Corp. and Canada's Jean Coutu Group Inc. for $4.525 billion.

CVS agreed to buy about 1,260 Eckerd stores, mostly in Texas and Florida, and Eckerd's mail-order business for about $2.15 billion.

CVS, based in Woonsocket, R.I., said the deal would make it the largest drugstore chain, with more than 5,000 locations in 36 states, $33 billion in annual revenue, and the filler of about 13 percent of the nation's retail prescriptions.

The Jean Coutu Group, based in Montreal, will get 1,539 Eckerd stores in 13 Northeast and mid-Atlantic states and the chain's Florida headquarters for $2.375 billion in cash. It said the stores would keep the Eckerd name.

Penney expects to earn $3.5 billion in cash after taxes and expenses, and said it could use the money to pay down debt or buy back shares of its stock.

The deal is subject to regulatory approval, but Penney expects it to close in the second the April-to-June period.

Penney, based in Plano, Texas, operates 1,020 department stores and has been trying to sell the Eckerd division for several months. Penney 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.

Penney chairman and chief executive Allen Questrom said Monday that selling Eckerd would allow both Penney to focus entirely on its department store and catalog and Internet business, which has seen improving sales and financial results the past three years.

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. "My mission was to see if we could get the business back," Questrom said. But Eckerd's performance instead stumbled in 2003.

"A lot of our shareholders wanted us to sell from the beginning," Questrom said.

CVS said it would rename the stores, which it will buy in cash, and spend about $350,000 per store in renovations from new lighting to changing their layouts and computer systems. Buying Eckerd's mail-order pharmacy in a stock transaction will double CVS in that sector.

CVS said the deal would cost it 12 cents to 15 cents per share in earnings this year but a gain of 15 cents to 20 cents per share next year, and 25 cents to 30 cents per share in 2006.

Most of the Eckerd stores CVS acquired are in Texas and Florida. Others are in Louisiana, Oklahoma, Mississippi, Arizona, Missouri, Kansas and Alabama. CVS also acquired distribution centers near Dallas, Houston and Orlando, Fla.

CVS chairman, president and chief executive Tom Ryan said the purchase fit his company's long-term strategy of expanding in the high-growth, Sunbelt markets. He said, however, that 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 to get the Eckerd stores performing at desired levels, starting with the Florida stores. He said Eckerd's Southern stores, which CVS bought, have seen a more dramatic drop in sales than the Northern outlets but had better locations.

Jean Coutu, which operates Brooks Pharmacy stores in the Northeast, said the deal would make it the fourth-largest drugstore chain in North America, with 2,196 stores.

Michel Coutu, president and chief executive, said Eckerd stores have excellent name recognition and market share in the Northeast and Mid-Atlantic states.

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.

The drugstore chain trailed key competitors CVS, Walgreen Co., RiteAid Corp. and Albertsons Inc.'s Osco and Sav-on chains in customer satisfaction research conducted last year by Wilson Health Information, which tracks customer satisfaction trends in the drugstore industry.