THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Friday, December 1, 1995 TAG: 9512010228
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: STAFF AND WIRE REPORT
LENGTH: Long : 107 lines
Rite Aid Corp., the nation's biggest drugstore chain, would become a colossus after its buyout of Revco D.S. Inc.
Rite Aid, based in Camp Hill, Pa., announced plans Thursday to buy Revco, another industry powerhouse, for $1.8 billion in cash and stock. The combined company, which would operate under the Rite Aid banner, would have more than $11 billion in annual sales and about 4,500 stores.
Both Rite Aid and Twinsburg, Ohio-based Revco have strong presences in South Hampton Roads. Together, they operate about 70 stores across the region.
But it wasn't immediately clear whether any of those stores would be shut down and how many jobs might be cut as a result of the buyout. Nationwide, Rite Aid plans to close roughly 300 stores. The companies said a decision on which of their drugstores will be closed will be made after the deal is completed, probably next year.
The merger has been approved by the boards of both companies but faces a federal antitrust review and is contingent on a successful direct offer to shareholders for their stock.
Real estate and company sources said the move came as a surprise, and they were not aware how the announcement would affect current and proposed Revco and Rite Aid stores.
``We had no idea it was coming,'' said a Rite Aid official who did not want to be identified.
He added that there were several local pharmacies that could be combined, but that most of the outlets here were robust.
If Rite Aid closes local stores, it will likely pick out underperforming or competing locations, said Joe Gladue, an analyst with Baltimore-based Chapman Co.
``They typically decide which ones are on the better corner, which ones are larger and which ones fit in with their typical store,'' Gladue said.
In South Hampton Roads, there are nearly 20 Rite Aid outlets and about 50 Revco stores. Many of the stores are located in the same communities, with several located within a few blocks of each other.
Both companies have aggressively remodeled and expanded in the region. Rite Aid recently announced plans to build new stores in Hampton Roads offering a wider selection of products and services. At the time, the company said it has begun building two of those stores in Newport News and was looking for additional sites in the area.
On Thursday, independent drugstore owners had mixed reactions to the merger.
``The health field and other fields are going toward monopolies,'' said Mac Knight, owner of Great Bridge Pharmacy in Chesapeake. ``Maybe the courts aren't calling them monopolies, but that's how we're seeing it.''
While independents generally agreed that the buyout would give Rite Aid more clout, they weren't sure whether it would directly impact their business.
``The independents that are left now - they are the cream of the crop,'' said Boris Schwetz, owner of Arthur's Drug Store Inc. in Norfolk. ``They can't get rid of us.''
Independent drugstores and even chains like Rite Aid face mounting pressure from health maintenance organizations and drug manufacturers. HMOs, for example, can get deeper discounts from drug makers in exchange for a pipeline to HMO members. Drug manufacturers want to take their own wares straight to the consumer through mail order of prescription benefit programs.
But Rite Aid and Revco weren't immune to those pressures, either. The deal underscores the continued consolidation of the drugstore business as changes in the medical industry heighten competition.
The merger means Rite Aid will be able to cut both jobs and expenses. It will be able to trim $156 million in annual costs by cutting 1,100 jobs by closing Revco's headquarters in Ohio and streamlining distribution expenses.
Rite Aid would also cut duplicative advertising efforts and expects to get better prices from its suppliers as the newly expanded company buys greater volumes of products from them.
Rite Aid owns Eagle Managed Care, a prescription benefits management company that has struggled against those operated by drug makers. As part of a bigger chain, Eagle will be able to stand up to such pharmacy benefits companies as Medco, owned by drug maker Merck & Co., and PCS Health Systems Inc., owned by Eli Lilly & Co., said Martin L. Grass, Rite Aid's chief executive.
``This combination should allow Rite Aid to offer customers the most competitive pharmacy prescription prices and services,'' Grass said in a statement.
Jeffrey Pittsburg, an analyst with Goldis-Pittsburg Institutional Services in Garden City, N.Y., agreed. ``It would provide economies of scale. That's why Rite Aid has to do what it's doing.''
Rite Aid has more than 2,700 stores in 21 states and the District of Columbia. Revco has more than 2,100 stores in 14 states. The announcement said the merger will leave the chain with 4,500 stores or more.
Rite Aid has had a longstanding desire to acquire Revco. From 1991 to 1992, the company made four offers to buy Revco while Revco was operating under bankruptcy court protection while it reorganized.
Revco entered bankruptcy proceedings in 1988, selling hundreds of stores to reduce its debt and restore profits. The company emerged four years later, then set off on an ambitious expansion plan that doubled its size. Last year, it bought the 1,150-store Hook-SuperRx chain for $632 million.
Earlier this year, Rite Aid paid $132 million in cash for Perry Drug Stores Inc. of Pontiac, Mich.
More recently, Rite Aid bought many of the drugstores operating in the New York City area from Pathmark, a supermarket chain. ILLUSTRATION: Color graphic
About the companies
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by CNB