Penney unloads Eckerd for $4.5 billion

/ Source: The Associated Press

The retailing giant J. C. Penney Co. Inc. is selling its struggling Eckerd drugstore chain for more than $4.5 billion in cash to rivals CVS Corp. and Canada’s Jean Coutu Group Inc.

The deal announced Monday will make CVS the biggest U.S. drugstore operator as measured by the number of stores, leapfrogging over industry leader Walgreen Co.

Rhode Island-based CVS and Montreal-based Jean Coutu Group, which owns the Brooks Pharmacy chain in the U.S., will split the 2,800 Eckerd’s stores in 23 states in the deal reached after the conclusion of a lengthy auction process.

“This sale will allow JCPenney to focus entirely on our core department store and catalog/Internet business,” said Allen Questrom, Penney chairman and chief executive.

Under the deal, CVS of Woonsocket, R.I., will get about 1,260 Eckerd stores and support facilities in Texas, Florida and the remaining southern states, as well as Eckerd’s pharmacy benefits management and mail order businesses, for $2.150 billion.

The deal will vault CVS past Walgreen with more than 5,000 stores in 36 states and the District of Columbia. Walgreen is currently the biggest with 4,336 stores as of the end of February while CVS had 4,179 as of early January.

CVS president and chief executive Tom Ryan said the acquisition fits its strategy of expanding in “the high-growth Sun Belt markets” where the overall population and the number of seniors are each expanding rapidly.

Distribution centers located near Dallas and Houston, Texas and Orlando, Fla., will be acquired by CVS.

Jean Coutu Group will get about 1,540 drug stores and support facilities located in 13 northeastern and mid-Atlantic states and the Eckerd home office in Florida, for $2.375 billion.

That will boost its drugstore holdings in North America to 2,196 stores. Its Brooks Pharmacy business operates 333 corporate pharmacies in seven northeastern states with its headquarters in Warwick, R.I., and its distribution center in Dayville, Conn.

It said the acquired Eckerd drugstores will continue to operate under the Eckerd name.
“This acquisition represents a unique opportunity to expand our presence in North America.

Eckerd’s network of stores is well positioned on the East Coast and gives us excellent market share in areas we have been targeting for some time,” said Michel Coutu, president and chief executive of The Jean Coutu Group USA Inc.

Plano-based Penney, which owns more than 1,000 department stores, said it expects to generate approximately $3.5 billion in cash proceeds after closing adjustments, taxes, fees and other expenses related to the transactions.

Company officials said the deal is subject to regulatory approvals, but is expected to be completed by the end of July when its second fiscal quarter concludes.

Penney officials have said that Eckerd failed to meet profit goals under a three-year turnaround plan.

Penney had initially hoped Eckerd would fetch $6 billion to $8 billion, but its value dropped and in February, the department store giant took a $450 million charge to reflect the lower value.

When Penney announced Eckerd’s acquisition in November 1996, the two companies expected to benefit from saved operating costs and synergies that would drive future business. Penney executives said they could help Eckerd with categories such as hosiery, since Penney at the time was the largest seller of pantyhose.

But analysts said early potential benefits were overshadowed by Eckerd’s problems with multiple systems integration. Eckerd struggled to combine all its computer systems and get a handle on merchandise under various private labels and national brands stocked throughout the chain.