Acquisition transforms Coutu into U.S. company

Despite the risks of taking on a huge debt to finance underperforming stores, Atkinson said Jean Coutu has few opportunities left to grow in Canada, which is dominated by three other chains.

The Toronto Star
April 7, 2004

Acquisition transforms Coutu into U.S. company
Buys ailing Eckerd stores from J.C. Penney. 85% of stores, 90% of sales to be derived from U.S.
Allan Swift

MONTREAL—Jean Coutu Group, which dominates the drugstore market in Quebec where it was founded, will be transformed into an American-focused company with the acquisition of 1,539 Eckerd drugstores in the eastern United States for $3.1 billion (Canadian).

Despite the magnitude of the acquisition announced yesterday, CEO François Coutu said he anticipates no problems in digesting and turning around the underperforming Eckerd stores sold by U.S. department store company J.C. Penney.

U.S. drugstore giant CVS Corp. is buying the other Eckerd drugstores to become the North American market leader, while Jean Coutu will vault into fourth place with a network of 2,196 stores.

Jean Coutu Group will remain second in Canada behind Shoppers Drug Mart.

Analysts agreed it will radically change the company founded by pharmacist Jean Coutu, who is still the chairman. It will more than double revenues to $15 billion and triple the number of employees to about 62,000.

Analyst Patricia Baker of Merrill Lynch said the family-run and controlled company "essentially becomes a U.S. company."

Baker said 85 per cent of its stores and 90 per cent of its revenues will be derived from its American operations. "The Canadian operations are dwarfed," she said in a note to clients.

François Coutu said the deal gives his company a new market in 13 states from Connecticut to South Carolina, contiguous with its network of 333 Brooks Pharmacies in seven northeastern states.

The southern states are popular with retirees, who tend to buy more prescription drugs.

Coutu said in a conference call his company couldn't afford to pass up the Eckerd purchase if it wants to keep growing. He added the company has the financing lined up to consummate its largest-ever acquisition without recourse to a public share issue.

"These opportunities don't come up very often," he said.

Retail consultant Maureen Atkinson agreed. Despite the risks of taking on a huge debt to finance underperforming stores, Atkinson said Jean Coutu has few opportunities left to grow in Canada, which is dominated by three other chains.

"I think it's a risk if they don't do it, quite frankly," said Atkinson, with J.C. Williams Group.

"There's limited opportunity in Canada to grow. They've proven they can operate successfully in the U.S., so I just think it's very good for them."

The acquisition will add 40,000 employees including 1,600 at the Eckerd head office in Florida, which Coutu is taking over.

The Jean Coutu Group currently employs 22,000, of which 8,900 work in the United States.

Baker estimates the acquired Eckerd stores had revenues last year of $7.9 billion and operating earnings of $342 million.

She believes the challenge and opportunity for Jean Coutu is to drive up the Eckerd stores' margins, currently at 4.3 per cent, to the Brooks level of 6.2 per cent.

Michel Coutu, CEO of the Jean Coutu Group in the United States, said the Eckerd stores would not overlap with the Brooks pharmacies. The combined networks will benefit quickly from joint procurement from suppliers, but he said it will be 18 to 24 months before there is a real turnaround.

CVS Corp. will pay about $2 billion (U.S.) for the other 1,200 Eckerd stores to become the biggest U.S. drugstore chain in terms of number of stores, vaulting past rival Walgreen Co.

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