Now that JCPenney has $3.5 billion burning a hole in its pocket, how will the company spend the proceeds from the sale of its Eckerd division? Penney's isn't interested in Target's Mervyn's or Marshall Field's divisions; but it may pick up a few off-the-mall Mervyn's locations considering the success of its own off-the-mall JCPenney test stores, says Bear Stearns analyst Christine Augustine. She adds that Penney will likely spend some of the capital it was wasting on underperforming Eckerd stores ($500 million in 2003) on remodeling some of its existing department stores.
Last week, Penney announced an agreement to sell its Eckerd operations to The Jean Coutou Group and CVS Corp. for $4.525 billion in cash. The transaction, which will close by July, will net Penney about $3.5 billion in cash after closing adjustments, taxes, fees and other transactional expenses.
Jean Coutou will acquire 1,539 Eckerd drugstores and their support facilities in 13 Northeast and Mid-Atlantic states for $2.375 billion. CVS will acquire 1,260 Eckerd drugstores and support facilities concentrated in Florida and Texas, as well as Eckerd's pharmacy benefits management and mail order businesses for $2.15 billion. Coutu's new stores represent $7.9 billion in annual sales and CVS' new stores represent $7.2 billion, according to company reports.
For Canadian chain Jean Coutu, the purchase represents a chance to break out of a growth rut now that the company's Canadian operations and its chain of 333 Brooks pharmacies in New England have hit walls. The purchase allows the company market penetration into 13 new states, although none where it will be the market leader. Coutu will carry on the Eckerd brand name, although the stores it is acquiring are some of the industry's worst sales performers. Coutu will continue to operate Eckerd's head office for the foreseeable future. "The debt the company is taking on might be scary; the size and scope of the acquired operation may be daunting; and it may take years to turn this purchase into shareholder value," says CIBC World Markets analyst Perry Caicco, "but it was the right long-term move."
The purchase will make CVS the largest U.S. pharmacy chain, with 5,000 stores, and is a direct to challenge to Walgreens, the current industry leader and fastest growing U.S. drug chain. The purchase offers CVS a relatively low-cost entry into the lucrative Sun Belt markets currently dominated by Walgreens, but "given the difficulty inherent in retail turnarounds, CVS has an immense challenge in front of it in terms of upgrading Eckerd stores to the point where they can compete head-on with Walgreens stores in hotly contested markets," says John Ransom, an equity analyst at Raymond James. CVS will spend approximately $350,000 per store re-branding the Eckerd locations and making technological and aesthetic upgrades -- a total of $440 million. CVS says synergies in distribution and advertising will yield annual savings of $100 million.
In other news, voters in the Los Angeles suburb of Inglewood have rejected a plan that would have allowed Wal-Mart to build a sprawling supercenter in the community. After spending more than $1 million on its Inglewood campaign, according to campaign finance records, Wal-Mart was hoping to open 40 supercenters in the state. The proposed Inglewood supercenter would have been the mega-chain's first installment.
With all 29 precincts and absentee ballots counted last Tuesday night, Inglewood voters overwhelmingly opposed the measure, 60.6 percent to 39.3 percent. The tally was 7,049 votes against the initiative, with 4,575 in favor. Activists said the Wal-Mart proposal would have hurt the community by driving out small businesses and encouraging sprawl trends.