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J.C. Penney to Buy Eckerd Drug Chain for Almost $2.6 Billion

November 4, 1996

PLANO, Texas (AP) _ The corner drug store may soon have a new name and a J.C. Penney catalog counter.

The department store giant announced Sunday an agreement to buy Eckerd Corp. for $2.59 billion in cash and stock, doubling Penney’s revenues from the retail drug business.

With the acquisition of Eckerd’s 1,724 stores, which had sales of more than $5 billion last year, J.C. Penney’s Thrift Drug Inc. subsidiary will operate about 2,800 drug stores with $10 billion in annual sales. Earnings from drug stores will account for about a third of J.C. Penney’s total sales.

J.C. Penney announced the purchase of 200 Rite Aid stores last month after buying the Fay’s drug store chain in the northeast and acquiring the 97-store Kerr Drug chain in January 1995.

``Our acquisition of Eckerd represents a major strategic step which creates one of the nation’s premier drug store businesses,″ said James E. Oesterreicher, J.C. Penney’s chief executive officer.

He said J.C. Penney Co. Inc. likely will put the Eckerd’s name on all its drug stores.

``We think there’s a large advantage to utilizing the equity that’s in the Eckerd name,″ he said. A decision on the stores’ names will be made in early next year when the deal is expected to close, he said.

Eckerd, which also includes 542 Express Photo labs in 11 states, was attractive because of its sales and earnings growth, said Oesterreicher. He also cited its ``strong presence and brand name recognition in markets with large and growing populations.″

He hinted Eckerd stores may take on a new look.

The J.C. Penney catalog counters now in Thrift Drug stores could be added to Eckerd stores, he said. Other additions could include more women’s hosiery and children’s novelty goods like those Penney sells.

Plano-based J.C. Penney said the proposed transaction already had been approved by the companies’ boards. In addition to paying $35 a share for Eckerd, it is assuming $760 million in Eckerd debt, bringing the cost of the acquisition to $3.3 billion.

The Eckerd deal makes sense as Penney tries to boost revenues despite slow growth in the department store sector, said Stephen Latz, retailing analyst at A.G. Edwards in St. Louis.

After Dayton Hudson, which has Target, Mervyn’s, Marshall Field’s and other chains, rebuffed Penney’s $6.8 billion merger proposal earlier this year, Penney apparently decided to take another tack, he said.

``I think when they didn’t make the Dayton Hudson deal, they said, `We’ve got this Thrift Drug, it’s making money, it’s got growth potential,‴ Latz said.

The deal is the latest in a consolidation in the drug store business. Companies are trying to expand markets and cut costs as health maintenance organizations demand deep breaks on drug prices.

Last month, Rite Aid Corp., the nation’s largest drug store chain, announced it was acquiring West Coast competitor Thrifty PayLess Inc. for about $1.4 billion in stock. Last week, No. 2 Revco D.S. Inc. reached agreement to purchase Big B Inc. for $380 million in cash.

Earlier this year, Rite Aid tried to acquire Revco, but gave up amid opposition from the Federal Trade Commission. The regulatory agency said such a strong combination could unreasonably raise prices.

Penney said it was offering $35 in cash for each of 37.1 million Eckerd shares, about 50.1 percent of the Largo, Fla.-based Eckerd.

Penney would then pay 0.6604 share of its stock, worth about $35 a share, for each remaining share of Eckerd. Penney’s board also has authorized the company to repurchase up to 15 million of its shares before the stock swap.

The offer is a 21 percent premium over Eckerd’s closing price on Friday of $28.87 1/2 a share on the New York Stock Exchange, where Penney closed at $53 a share.

Penney said it will merge its Thrift Drug subsidiary with Eckerd. Frank A. Newman, president and chief executive of Eckerd, will become chief executive officer of the combined companies, reporting directly to Oesterreicher.

The transaction is subject to approval by shareholders and regulators.

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