Rite Aid solicits offers for PCS unit

Outright sale or stake in pharmacy-benefits manager proffered

Drugstores

October 05, 1999|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Rite Aid Corp. said yesterday that it will consider offers to purchase all or part of PCS Health Systems Inc., its wholly owned pharmacy-benefits-management subsidiary.

The Camp Hill, Pa.-based drugstore chain made the announcement yesterday after its board of directors authorized management to entertain offers for PCS.

"Rite Aid will evaluate an outright sale of PCS or a strategic investment in PCS," the company said in a statement.

The possibility of a sale took one analyst who follows the company by surprise.

"They had talked about the idea that they were not going to be losing or yielding any kind of operating control of the company, but that they might look for a joint venture," said Jonathan H. Ziegler, an analyst with Salomon Smith Barney in San Francisco.

Earlier in the day, Rite Aid said it hired investment banker J. P. Morgan & Co. to advise it on alternatives for PCS.

"We've received a number of inquiries over the last few days," said Sarah Datz, a Rite Aid spokeswoman. "We expect to have an idea of the direction we're going to go in the next 60 days."

The No. 3 U.S. drugstore chain purchased PCS on Jan. 22 for $1.5 billion from Eli Lilly & Co. The subsidiary manages the pharmacy portion of health insurance benefits for about 50 million customers.

On Friday, Rite Aid Chief Executive Officer Martin L. Grass told analysts that the company had received unsolicited offers for PCS valued at more than $1.5 billion.

"PCS has had a very good year and has shown record sales and profits," Datz said. "We believe the current value is in excess" of $1.5 billion.

Ziegler also said he believes that PCS has appreciated in value. "The reason [Rite Aid's] balance sheet became so highly leveraged is because they bought PCS," he said.

Selling the subsidiary would help pay down debt, but staying in the pharmacy-benefits business makes sense for Rite Aid because of its relationship with drugstore.com, Ziegler said. Rite Aid owns about 22 percent of drugstore.com, an online supplier of health, beauty and pharmacy products.

The $13 billion company, which has about 3,800 stores, has struggled over the past year, and Rite Aid shares have lost more than 70 percent of their value since January. The company reported a 39 percent drop in fiscal fourth-quarter earnings in March, attributing the decrease to new store openings. Three months later, Rite Aid restated its last three years of earnings after its accounting practices were reviewed by the Securities and Exchange Commission.

Rumors about sale of the chain or a portion of it arose after Rite Aid postponed a Sept. 2 meeting with analysts because of "discussions involving possible corporate transactions that, if consummated, would be material."

Stock prices tumbled again late last month after the Florida attorney general's office charged the company with deceptive trade practices, civil theft and racketeering. Rite Aid denied the charges.

On Friday, Moody's Investors Service lowered the company's debt ratings, pointing to the company's sluggish profit margins and high adjusted leverage.

Rite Aid's stock closed yesterday at $13.25, down 37.5 cents.

In recent weeks, the company has taken steps to trim costs, announcing it would cut 330 corporate and field staff jobs to save about $20 million a year. Staff overhead expenses had been growing at a rate faster than business could support, Grass said.

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