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Market Update : 
Rite Aid Confirms $2.55 B Deal
Author: Staff
Last Update: 4:39 PM EDT August 24 2006

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Rite Aid (RAD) confirmed that it has agreed to buy Eckerd and Brooks stores, two competing chains, from Jean Coutu for $2.55 billion in stocks and cash. The company will pay $1.45 billion in cash and issue 250 million shares.

The combined operation will have $26.8 billion in revenue and assume $850 million in debt of Brooks and Eckerd. The Jean Cotou Group will have 32% of the combined company stock and 30.2% voting power in the company. The Jean Coutu Group USA includes 1,858 drugstores (337 Brooks stores and 1,521 Eckerd stores) and six distribution centers, all located primarily on the East Coast and in the Mid-Atlantic states. All of the stores will be re-branded Rite Aid and Rite Aid headquarters will remain in Camp Hill, PA.

The company after the acquision will have 5,000 stores and icrease its foot print from 14 states to 31 states. The stores Rite Aid will acquire are located in 18 states, with Rite Aid currently operating in 14 of the states and adding Massachusetts, Rhode Island, South Carolina and North Carolina to its national footprint.

The combined company will be the third largest store chain when measured on number of store locations only to follow 6,170 stores ar CVS (CVS) and 5,200 stores at Walgreen. Walgreen (WAG) leads the industry in revenue and profitability.

A remarkable comeback for a store chain Rite Aid (RAD) in less than five years. In 1999 the company faced near collapse under mountain of debt accumulated in the second half of 1990s. The ensuing federal grand jury profit investigation led to the resignation of Martin L. Grass, CEO at the time, and son of the company founder. In year 2000, the company had profit restatement of more than $1.7 billion after the scandal broke out and Mr. Grass is serving a seven year prison sentence for his role in hindering the federal investigation.

Rite Aid has shown a steady rise in sales in its core market but profits have been hard to come by. The inconsistent earnings, heavy debt load and costly expansion in the core market has hobbled the company profits in the past five years. In the most recent year ended in March 2006 the company reported sales of $17.3 billion and $1.27 billion in profit or $1.89 per share. The company has reported earnings per share of $0.47 in the fiscal year 2004 and $0.11 in the fiscal year 2003. The company was unprofitable in 1999, 2000 and 2001.

Grocery stores and discount stores such as Costco and Wal-Mart have been expanding in drug sales and adding further to the pressures faced by stand-alone drug store chains. Walgreen, which has organically grown has been looking at several independent drug store chains. CVS recently acquired 700 SavOn stores from the grocery chain Albertsons.

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