Eckerd Pieces Worth More Than Whole

Discussion
Jan 29, 2004
George Anderson

By George Anderson


J.C. Penney is considering dividing its Eckerd drug store chain into two parts for sale to the highest bidders, reports Reuters.


Two companies, CVS and Rite Aid, are said to have strong interest in Eckerd’s stores in the southern U.S. despite these being among the worst performers. CVS and Rite Aid both look at a possible Eckerd acquisition as a means to establishing a substantial presence in the south that neither currently enjoys.


CVS, Rite Aid and the Canadian drug store chain Jean Coutu Group have all submitted bids to buy the entire Eckerd franchise. Both CVS and Rite Aid would face regulatory scrutiny for Eckerd’s northern stores, since both enjoy a strong market presence in those areas.


Moderator’s Comment: What are your thoughts on the possible sale scenarios for the Eckerd drugstore chain?


Splitting the stores into two groups should work out well for JCP. The separated business will deliver a greater return than the chain sold as a whole.
It appears as though both CVS and Rite-Aid are willing to pay extra for the immediate market presence buying Eckerd’s southern stores would give them.


We have great admiration for the job Robert Miller and company have done in getting Rite Aid turned around and putting the company’s finances in order.
It’s for that reason that we think the drugstore chain should take a pass on this deal.


We understand the allure of having a ready-made market, but Eckerd’s problems in the south are going to require much more than a change in the banner hanging
over the store to put things right. Rite Aid’s resources are better spent pursuing the course Mr. Miller has in place than in taking on a “one foot on a banana peel” challenge
such as this.


CVS is in a better position financially to take over Eckerd, but the deal does run contrary to the chain’s normal organic growth approach to business. No
doubt, CVS management can make this work, but whether they should bother trying is the question we can’t stop asking ourselves.


Jean Coutu Group appears to be the only legitimate bidder for Eckerd’s northern stores, considering the regulatory hoops CVS and Rite Aid would likely have
to jump through to make this deal. The stores proximity to the company’s Canadian headquarters base also makes this a deal worth pursuing.


If we were Jean Coutu management, however, we’d thank JCP for breaking the deal into two parts and decline to bid on the southern stores.
George
Anderson – Moderator

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