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CVS to acquire Revco for $2.9 billion in stock

February 7, 1997

CLEVELAND (AP) _ CVS Corp., a leading East Coast drugstore chain, is branching into the Midwest and South and to the top tier of pharmacies with the $2.9 billion takeover of Revco DS Inc. announced Friday.

CVS, still concentrated east of the Mississippi, would have the most outlets of any drugstore chain and would be second only to Walgreens in terms of revenue.

The two companies agreed to the deal amid tougher competition from mail-order drug sellers and big supermarket pharmacies. By combining, the drugstores hope to gain more bargaining power by offering insurers a longer list of potential patients.

``I think that it is important to have some leadership in the market and to have innovative products and services that help managed care companies lower cost and increase their client base,″ Thomas Ryan, CVS chief operating officer, said Friday.

He said CVS wanted an acquisition that would give it leadership in new markets, allow it to make improvements in its pharmacy business and increase earnings. Revco is strong in the pharmacy end of the business, he noted.

Some analysts said they did not expect antitrust issues _ which derailed Revco’s purchase by another chain last year _ to be a major obstacle.

Rite Aid Corp. last year dropped a $1.8 billion deal with Revco after the Federal Trade Commission said Rite Aid would gain too much of the market and threatened to sue to block the deal.

``The FTC has pretty clearly said that absolute size is not the determining factor, but that it is dominance within specific markets that causes concern,″ said Joe Ronning, an analyst with Brown Brothers Harriman & Co. in New York. ``And these companies (CVS and Revco) are mostly in different markets.″

Chriss Street, who has his own advisory firm in Newport Beach, Calif., agreed. He said the CVS-Revco deal appeared aimed more at expanding over a broader area than becoming dominant in a smaller region.

``I think Rite Aid was trying to buy Revco to defend its competitive position,″ he said. ``Rather than a defensive move, this seems to be more of an offensive move to establish the first national drug distribution platform.″

Ryan would not say how many of the companies’ stores overlap but said it was a ``minimum number.″

``This deal is a lot different from the Rite Aid-Revco deal,″ he said. ``We essentially operate in two distinct geographic areas, with our stores in the Northeast and mid-Atlantic regions and Revco operating primarily in the Midwest and Southeast,″ he said.

The talks may have been pushed along by the November announcement that J.C. Penney agreed to buy Eckerd Corp. for $2.59 billion in cash and stock.

CVS would stretch as far west as Illinois and as far south as Georgia and Alabama with the Revco deal. The combined companies would have 4,000 outlets and revenues this year of about $13 billion.

Under a formula agreed to by the companies, Revco shareholders will exchange each of their shares for CVS stock that is worth $42.11 at Friday’s closing price. CVS also is assuming about $900 million of Revco debt.

Revco’s shares rose $3.37 1/2 a share to $41.37 1/2 on the New York Stock Exchange, while CVS rose $3.12 1/2 to $47.12 1/2.

Ryan said the deal should generate $100 million in annual savings. He said CVS would move 100 stores and open 200 stores.

The combined company will be called CVS and will remain based in Woonsocket, R.I. The Twinsburg headquarters of Revco will be phased out by the end of 1997, but few other job cuts are expected, Ryan said.

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