Walgreen to Buy Duane Reade Drugstores for $1 Billion

Walgreen storeWalgreen (WAG) said Wednesday it will acquire drugstore chain Duane Reade from affiliates of private equity firm Oak Hill Capital Partners in a deal valued at $1.08 billion, which includes assumption of the New York-based drugstore's debt.

Walgreen, the nation's largest drugstore operator, will fund the purchase of the 257 Duane Reade locations with existing cash and expects the deal to close by the end of August. Duane Reade had net sales of $1.8 billion last year, Walgreen said."Duane Reade is a compelling strategic acquisition that will immediately provide Walgreen with a leading position in the largest drugstore market in the U.S.," said Walgreen CEO Greg Wasson in a statement.

Walgreen expects the acquisition to be dilutive to earnings per share in the first year after closing and accretive to earnings thereafter. The company said it expects to achieve cost savings of $120 million to $130 million in the third year after the deal closes.

"We are very pleased that this national leader has recognized the successful transformation under way at Duane Reade, which is built upon a 50-year history of serving the needs of New Yorkers and has been supported by our shareholders, including Oak Hill Capital Partners," said Duane Reade CEO John Lederer in a statement.

The Brand Will Survive

Duane Reade drugstores, which are as much a fixture of New York streets as hot dog carts -- and as pervasive -- will continue to operate under their own brand.

"As a New Yorker, you won't see a difference," said Wasson in a conference call with analysts after the deal was announced. He said Walgreen may get involved in the "back of the store," upgrading pharmacies -- an area where his company has an advantage -- and in purchasing, where Walgreen's size will also be a plus.

Walgreen may also borrow some improvements Duane Reade has put in place as part of its own ongoing renovation. Wasson singled out the new line of private-label products, a new store design with wider aisles and a store-within-a-store department called Look Boutique, which features upscale beauty products.

Easier to Buy Than to Build

"We are acquiring prime assets in the prime market in the country," said Wade Miquelon, Walgreen chief financial officer.

Walgreen had been trying for years to crack the New York market, said Wasson, but acquiring store space in urban areas is complex and time-consuming, especially in New York.

Both Wasson and Lederer conceded that Duane Reade has a number of leases that will have to be renegotiated, which had stopped other previous suitors. But Wasson said Walgreen already has a real estate team seeking leases for its own stores in the city, so it will put those people to work renegotiating Duane Reade's leases. Lederer noted that should be easier in this weak economy.

The acquisition prompted Standard & Poor's analyst Joseph Agnese to upgrade shares of Walgreen to buy from hold. "With the deal providing a market-leading retail footprint in New York City," Agnese wrote in a report to clients, "we see significant advantages from sharing of best practices with Duane Reade's strengths in nonpharmacy [retail] complementing Walgreen's strengths in pharmacy, in addition to significant [cost] synergies."

With reporting by Mercedes Cardona
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