Coutu’s deal for Eckerd stores vaults chain into the top ranks

In one fell swoop, Longueuil, Que.-based Coutu will go from eighth place as a regional player centred in New England and Quebec — with 657 locations — to the fourth-largest drugstore operator, boasting 2,196 stores, mostly in the U.S. Northeast and mid-Atlantic. Estimated annual sales — on a pro forma basis — will jump to $14.9-billion (Canadian) from $4.3-billion, with 90 per cent of that revenue generated in the United States.

The Globe and Mail
April 6, 2004

Coutu’s deal for Eckerd stores vaults chain into the top ranks
Quebec chain to become fourth-largest drugstore operator in North America
Bertrand Marotte

MONTREAL — Jean Coutu Group (PJC) Inc.'s much-anticipated deal to buy 1,539 Eckerd drugstores from J.C. Penney Co. Inc. for $2.4-billion (U.S.) will vault the family-controlled retailer into the ranks of the top five North American pharmacy chains with operations south of the border dwarfing its Canadian presence.

In one fell swoop, Longueuil, Que.-based Coutu will go from eighth place as a regional player centred in New England and Quebec — with 657 locations — to the fourth-largest drugstore operator, boasting 2,196 stores, mostly in the U.S. Northeast and mid-Atlantic. Estimated annual sales — on a pro forma basis — will jump to $14.9-billion (Canadian) from $4.3-billion, with 90 per cent of that revenue generated in the United States.

"This gives us a unique opportunity to expand our presence in North America," Coutu president and chief executive officer François Coutu — the son of founder and chairman Jean Coutu — said during a conference call.

Patricia Baker, analyst with Merrill Lynch Canada Inc., characterized the acquisition in a research note as "a profound event in the history of the company.

"With the acquisition, this family-run/family-owned Quebec company essentially becomes a U.S. company."

While the acquisition was widely applauded by analysts, some concerns were expressed about the additional debt the company is taking on to finance the deal and potential difficulties in integrating and boosting the lacklustre performance of the Eckerd stores.

Jason Bilodeau, of UBS Securities Canada Inc., said rolling the new stores into the Coutu empire ''will not be easy, in our opinion.''

François Coutu said his company had been eyeing the Eckerd chain for years. As one of the last remaining North American drugstore assets to go on the block, Coutu couldn't afford to pass it up, he said.

Coutu's attempt to take over Canadian rival Shoppers Drug Mart Corp. failed in 1999.

It was outbid by a $2.55-billion cash offer from powerful New York investment firm Kohlberg Kravis Roberts & Co.

Family patriarch Jean Coutu, 76, opened his first store in a working-class neighbourhood of Montreal 50 years ago. The company grew to become Quebec's largest drugstore chain, then embarked on an aggressive growth strategy in the United States, beginning with the 1994 purchase of the 221-store Brooks chain in New England.

In a definitive agreement, announced yesterday but under negotiation for months, Coutu said it is acquiring about half of J.C. Penney's Eckerd stores located in 13 states, including New York, New Jersey, Pennsylvania and North and South Carolina.

The Eckerd outlets will retain the Eckerd name but will be fully integrated into Coutu's U.S. operations under the existing Brooks banner, François Coutu said. The all-cash transaction will be financed with bank debt and public notes and is scheduled to close in June.

Coutu rival, CVS Corp., of Woonsocket, R.I., is to pay $2.1-billion (U.S.) for J.C. Penney's remaining 1,200 Eckerd stores, located primarily in Texas and Florida, as well as J.C. Penney's mail-order benefits management program. No. 2 player CVS will leapfrog over giant Walgreen Co. as the biggest drugstore network in North America as a result of the acquisition.

There will be immediate benefits, such as cost reductions from joint procurement from suppliers, said François Coutu and his brother Michel, who heads up U.S. operations.

There is virtually no overlap in stores and no closings are expected, they added.

Coutu's shares rose 15 cents yesterday to close at $18.25 on the Toronto Stock Exchange in heavy trading.

The Coutus said they intend to raise Eckerd's profit margins from 4.3 per cent to the 6.2-per-cent average at Brooks stores within three to four years. Citing Coutu's reputation to "underpromise and overdeliver," they said those results could be attained sooner.

TD Securities Inc. analyst Christiane Dubeau said the acquisition should add 38 cents a share to the bottom line in fiscal 2006.

"We believe that integration risk is reduced given the low acquisition cost, favourable interest rate financing, strong industry outlook (e.g., favourable demographics, introduction of new drugs, new U.S. Medicare plan) and strong track record."

DRUGSTORE CONSOLIDATION
Longueil, Que.-based Jean Coutu, in acquiring 1,539 Eckerd Drugstores from J.C. Penney Co. Inc., has vaulted to the top four pharmacy chains in North America, with 90% of revenues now coming from the United States.

Outlets:
CANADA
Ontario: 12
Quebec: 294
New Brunswick: 18
UNITED STATES
Maine: (Brooks) 6
New Hampshire: (Brooks) 37
Vermont: (Brooks) 32
New York: (Eckerd) 360 (Brooks) 2
Massachusetts: (Brooks) 164
Rhode Island: (Brooks) 47
Connecticut: (Eckerd) 6 (Brooks) 44
Pennsylvania: (Eckerd) 296
Ohio: (Eckerd) 2
New Jersey: (Eckerd) 148
Delaware: (Eckerd) 22
Maryland: (Eckerd) 20
Virginia: (Eckerd) 87
West Virginia: (Eckerd) 2
North Carolina: (Eckerd) 252
South Carolina: (Eckerd) 107
Tennessee: (Eckerd) 47
Georgia: (Eckerd) 190
Revenues:
Jean Coutu Group: C$4.0-billion
U.S.: 64%
Can.: 36%
With newly acquired stores: C$14.9-billion
U.S.: 90%
Can.: 10%
Number of stores: 657 stores
U.S.: 51%
Can.: 49%
With newly acquired stores: 2,196 stores
U.S.: 85%
Can.: 15%
North American rankings
CVS with newly acquired stores: 5,442
Walgreens: 4,368
Rite Aid: 3,382
Jean Coutu* with newly acquired stores: 2,196
Katz Group*: 1,246
Shoppers Drug Mart*: 1,700
Osco/Sav-On (Albertsons): 707
Longs Drug Stores: 471
Duane Reade: 241
(* Canadian-owned)


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