[frequensearules]

Yeah, little chance of any competition .


Walgreen Agrees to Buy New York's Duane Reade

Largest U.S. Drugstore Chain to Pay $620 Million, Plus Debt, for 257-Store Company With Strong Regional Presence

By PETER LATTMAN And TIMOTHY W. MARTIN

Walgreen Co. agreed to buy Duane Reade for about $620 million, excluding debt, giving the largest U.S. drugstore chain a dominant presence in New York City.

The deal, an all-cash transaction that includes the assumption of $480 million in debt, is Walgreen's largest retail acquisition ever. It will tack on 257 stores in the New York area, the biggest drugstore market in the U.S. The Deerfield, Ill.-based chain had been slow to build a presence in New York, with just 13 stores in Manhattan and 70 in the broader metropolitan area.

In an interview, Walgreen Chief Executive Greg Wasson said that without the acquisition, "it would have taken us many, many years, through our organic growth model, to gain that type of presence" in New York. He said on an investor call Wednesday that Walgreen would keep the Duane Reade name but decide over time "as to the best and most effective way to harmonize" the two brands.

Walgreen, which posted $63 billion in sales across its 7,162 stores last year, will look not only to gain a sales boost from the acquisition but also to capitalize on Duane Reade's new product and marketing initiatives. A traditionally conservative company, Walgreen has posted weaker results in recent months than its largest competitor, CVS Caremark Corp., which has moved more quickly to adopt innovative ideas such as loyalty-card programs and in-store cosmetic departments.

The deal also speaks to broader shifts in how consumers buy drugs. As Wal-Mart Stores Inc. and Target Corp. have enticed shoppers with less expensive prescription drugs, pharmacy chains have looked to upgrade their food and general-merchandise offerings to drive sales.

With most of its locations in New York City, Duane Reade is largely insulated from competition from big-box retailers. It has also focused on consumables such as a private-label food offerings under its DR Delish brand, hawking spicy Cajun trail mix and dark chocolate-covered almonds near the cash register.

"Duane Reade, despite its smaller size, has been outpacing the folks in Deerfield in terms of innovation," said Craig Johnson, president of Customer Growth Partners LLC, a retail consultant based in New Canaan, Conn.

Duane Reade's owners, Oak Hill Capital Partners, will exit the deal with a profit in what has been a challenging investment for the private-equity firm. The chain had struggled under a roughly $550 million debt load since 2004, when Oak Hill acquired the company in a $750 million leveraged buyout.

Last year, Oak Hill injected $125 million of new equity into Duane Reade to help reduce its leverage. Oak Hill will generate a roughly 12% net annualized return on the deal.

The New York chain not only redesigned its balance sheet. For the past two years it has initiated a revamp of its often-cramped and disheveled stores, installing wider aisles, walk-in health-care centers and a beauty-boutique concept selling high-margin moisturizers and lipstick. It has thus far remodeled or opened 30 stores under its new concept. Walgreen management made the decision to move forward with the acquisition in recent months, after visiting a handful of the revamped Duane Reade stores. "I can't overemphasize the fact that we like what they are doing," Mr. Wasson said.

Duane Reade, which generated about $1.8 billion in revenue last year, has also had legal issues. In 2008 federal prosecutors brought accounting-fraud charges against the firm's former CEO Anthony Cuti and former Chief Financial Officer William Tennant. A criminal trial in federal court in Manhattan is set for next month.

Duane Reade was founded in 1960 by brothers Abraham, Eli and Jack Cohen. It took its name from its first store, located in between Duane and Reade streets in Manhattan's Tribeca neighborhood. Bain Capital acquired it from its founders in 1992, sold it to DLJ Merchant Banking in 1997. After Duane Reade went public in 1998, Oak Hill took it private again.

http://online.wsj.com/article/SB2000...122423216.html