Walgreen to buy drugstore chain Duane Reade, leapfrogging into the lead in NYC metro area

Walgreen buying NYC market leader Duane Reade

NEW YORK — Walgreen Co. is looking to make itself an instant success in New York City — where the nation’s largest drug store chain has until now been just a bit player.

Walgreen announced plans Wednesday to buy privately held Duane Reade in a deal that will more than quadruple the number of stores it has in the metro area and make Walgreen the dominant player the biggest market in the country.

Walgreen, the nation’s largest drugstore operator, agreed to would pay about $623 million for Duane Reade Holdings Inc., which is the biggest drugstore chain in the city, where it has operated for 50 years.

The deal unites two chains that are in transition. Walgreen is trying to improve sales by converting thousands of stores to a new, cleaner layout, trimming the total number of products the company carries, and targeting consumer tastes more closely.

Duane Reade, which has been losing money, has made similar changes to 30 of its 257 stores. Duane Reade stores will keep their name, which comes from two lower Manhattan streets, for now. Walgreen plans to continue converting Duane Reade stores to the new format, and said all stores should be converted in four or five years.

Duane Reade’s 2009 sales totaled about $1.8 billion. Walgreen had sales of $63.34 billion in fiscal 2009, but although sales keep growing due to new store openings, analysts are concerned that it is losing market share to rival CVS Caremark and to big box retailers.

Walgreen, based in Deerfield, Ill., operates 70 stores in the New York area, but said it would take many years to match the amount of stores and the quality locations Duane Reade already has.

Walgreen Chief Financial Officer Wade Miquelon said Walgreen is trying to keep Duane Reade’s current management team in place.

The deal gives Walgreen more than 300 metro area locations.

Buying Duane Reade gives Walgreen more than just locations, said Walgreen Chief Financial Officer Wade Miquelon.

“They’re doing some things that are leading edge,” Miquelon said in a telephone interview. “They’ve really created kind of an urban centric format that could be as relevant in San Francisco, Chicago, etc., as it is in New York.”

Under the terms of the deal, Walgreen will assume $457 million in debt held by Duane Reade, which has been losing money. Walgreen will also be able to use Duane Reade’s losses to reduce its own income tax payments. Walgreen said the lower taxes add about $100 million in value to the deal, which knocks about 10 percent off the purchase price.

It would have taken Walgreen about 10 years to get that many stores on its own, said Barrington Research analyst Alexander Paris.

“New York City is the largest drugstore market in the country, and Walgreen gets 257 prime locations immediately,” he said.

Rite Aid and CVS each have around 200 stores in the area. Neither company would comment on the idea of a competing bid for Duane Reade. Duane Reade is owned by a group that includes affiliates of the buyout firm Oak Hill Capital Partners, which bought the company in 2004.

The deal, which requires regulatory approval, is expected to close by the end of August. In addition to the stores, it includes the Duane Reade corporate office and two distribution centers.

Walgreen had 7,162 stores overall as of Jan. 31.

The company will fund the buyout with existing cash, and will not need to raise money to complete the deal. Walgreen expects the purchase to cut its profit by close to 10 cents per share in fiscal 2010 and by about 3 cents per share in fiscal 2011. The buyout will cut costs between $120 million and $130 million by the third year.

Most of the savings will come from increased bargaining power to get lower prices on pharmaceuticals and products, Miquelon said. The rest will come from consolidating warehouses and combining other expenses.

Oak Hill Capital is based in Stamford, Conn., and its portfolio includes technology and software companies and restaurant operators among others. The Oak Hill Web site lists American Skiing Co., and The Container Store Inc. among current or previous holdings.

Shares of Walgreen rose 11 cents to $34.19.

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AP Business Writer Damian Troise in New York contributed to this report.