Changes in the health care industry and a growing consolidation movement sowed the seeds of Rite Aid Corp.'s $1.8 billion acquisition of Revco D.S. Inc., a deal announced late Wednesday that will create the nation's largest drugstore chain, analysts say.
The merger will make Rite Aid -- already the No. 1 chain in the number of stores and fourth in revenue -- an even greater colossus, with more than $11 billion in annual sales and more than 4,500 stores in 22 states and Washington.
"The reason this deal was done, it's my belief you have to get larger to maintain your competitive edge," said Rite Aid Chairman and Chief Executive Martin Grass, a Baltimore County resident who serves on several area boards. "It'll make us a very, very strong drugstore chain."
Camp Hill, Pa.-based Rite Aid, a chain of 2,717 stores in the Northeast and Midwest, has been growing by acquisition for years. It picked up its pace this year, buying nearly 300 stores in four other transactions. But none has matched the size and scope of the purchase of Revco, a Twinsburg, Ohio-based chain of more than 2,100 stores in the Midwest, Southeast and Eastern states. Revco is the nation's No. 2 drugstore chain in terms of the number of stores and the sixth-largest in terms of revenue.
Rite Aid is "going to achieve a scale that's basically unprecedented," said Juan V. Noble, an analyst with Jackson Partners & Associates in New York. "There is no question there are certain synergies they can achieve. I think their leverage with suppliers is going to increase tremendously."
Revco President and Chief Executive D. Dwayne Hoven acknowledged as much in a statement yesterday. "In an environment of consolidation," he said, "Revco's board of directors felt that this offer was fair and reasonable, and in the best interest of our stockholders."
Rite Aid, however, was motivated by more than the idea of building big to increase its purchasing power -- a move afoot in banking, media and other sectors of the economy. Although the deal will set Rite Aid apart from Walgreen Co., its closest competitor with about $10.4 billion in annual sales and 2,085 stores, analysts say the Revco deal was in part a defensive measure.
As more people move into managed health care plans, the industry has grown in prominence, and so, too, has its financial influence over drug store retailers. Analysts say that nearly 65 percent of both Rite Aid and Revco's prescription drug sales come from patients who are referred to the retailers by pharmaceutical benefit managers, companies that provide discounted prescription drug services.
