By Phil Wahba
NEW YORK (Reuters) - Walgreen Co
Duane Reade is owned by Oak Hill Capital Partners LP and operates 257 drugstores in the New York metropolitan area. Its sales totaled $1.8 billion last year and it has the highest sales per square foot in the U.S. industry, according to Walgreen.
"We like their footprint, how it matches up with us," Walgreen Chief Executive Greg Wasson said of Duane Reade in an interview with Reuters. "(It) gives us a leading presence in Manhattan as well as supplements what we have in the boroughs in New York."
The acquisition of Duane Reade is Walgreen's biggest acquisition in its 109-year history as Wasson expands the chain's presence and overhauls its stores.
"They have a pristine balance sheet -- it was only six months ago that everyone was asking how can drugstores grow their top line," said Bill Smead, chief executive of Smead Capital Management in Seattle, who holds Walgreen shares.
Smead predicted that in 10 years, Walgreen and main rival CVS Caremark Corp
Adding Duane Reade will boost Walgreen's national market share to an estimated 27.7 percent from 27 percent, according to IBISWorld. CVS follows closely behind, with 26 percent, and Rite Aid Corp
The deal also includes the assumption of $457 million in debt. Oak Hill Capital Partners took Duane Reade private in July 2004 for $415 million, excluding debt, and said the sale to Walgreen "has generated a solid return for our investors."
Once the deal closes, Walgreen will operate more than 300 stores in the wider New York area, a tally Wasson said would put it on par with Rite Aid and CVS.
"It would take many years of organic growth to reach the store count that this acquisition brings us," said Wasson, who started as a pharmacy intern at Walgreen in 1980.
Earlier this month, Walgreen posted a surprising drop in January same-store sales as high unemployment weighs on consumer spending and a boost from the flu season waned.
Walgreen shares were up 0.4 percent to $34.22 in Wednesday afternoon trading.
DUANE READE TO KEEP ITS NAME
Duane Reade opened in 1960, named after its first location near New York's City Hall on Broadway, between Duane and Reade streets. The company began to overhaul its stores in the last two years to update its decor and add walk-in health services.
The chain will continue to operate under its brand name and Walgreen expects to retain the employees at its stores, pharmacies and distribution centers.
Walgreen operates 70 stores in the New York area. They include a multi-story flagship store opened in 2008 in Times Square, across the street from a Duane Reade, to show the Deerfield, Illinois, chain had designs on New York.
Wasson said there are no plans to close either Times Square store, but the company said in a statement Wednesday that it would decide over time how "to harmonize" both chains. It also plans to spend $60 million in the next few years on new Duane Reade stores and remodels of existing locations.
Walgreen expects the deal to close by August 31 and to shave 3 cents per share from fiscal 2011 earnings. It sees Duane Reade adding to 2012 earnings per share "by mid-single digits" and potential savings of $120 million to $130 million in the third year after closing.
Walgreen has opened most of its more than 7,160 stores on its own. While it has pared back its rapid store openings, it is still opening hundreds of stores a year.
In late 2008, Walgreen started sprucing up stores with lower shelving, fewer items and better signs to help consumers find what they need, under a program the company dubbed its "CCR" program, for customer-centric retailing.
Wasson said the acquisition would not distract Walgreen while it revamps its stores, noting its purchase in 2006 of the Delaware-based Happy Harry's chain.
Peter J. Solomon Co. was financial adviser to Walgreen and Wachtell, Lipton, Rosen & Katz served as legal counsel. Goldman Sachs & Co and Bank of America Merrill Lynch were co-financial advisers to Oak Hill and Duane Reade, with Paul, Weiss, Rifkind, Wharton & Garrison providing legal counsel.
(Additional reporting by Jonathan Stempel, Jessica Wohl and Megan Davies; Editing by Michele Gershberg, Derek Caney, Tim Dobbyn)
