Albertsons' stand-alone drug stores could be good fit for CVS

Drug Store News,  Oct 10, 2005  by Doug Desjardins

• E-mail
• Print
• Link

BOISE, Idaho -- CVS has entered the picture as a potential buyer for a piece of Albertsons. The chain is reported to have an interest in acquiring Albertsons' 695 Sav-on and Osco drug stores if they're made available as a separate piece of the supermarket chain.

Analysts say CVS is the leading suitor for Albertsons stand-alone drug stores and has a particular interest in its Southern California locations. Lehman Bros. analyst Meredith Adler said CVS management "has indicated an interest in acquiring the Albertsons stores that might become available in the next few months, though it is not desperate to obtain the stores and-will not overpay."

Albertsons' stand-alone drug stores "are attractively located, and the boxes are not too large," Adler noted in the report, which toplined mid-September meetings between institutional investors and CVS chief financial officer David Rickard. The stores include about 100 locations in the Chicago market, 50 in Kansas City, Mo., 75 in Phoenix and 331 in Southern California. "CVS thinks all the stores have the potential to be managed more effectively and achieve higher profitability under CVS ownership," Adler commented.

Analyst George Whalin of Retail Management Consultants in San Marcos, Calif., also has tabbed CVS as a potential buyer, being as it now is trying to build market share in Southern California. CVS re-entered the Los Angeles market in 2003 and has been expanding in the region gradually. CVS currently operates 20 stores in the Los Angeles/Orange County market.

Buying the chain would instantly make it a market leader and give it a leg up on Walgreens, which opened a new distribution center in Southern California in 2004 and plans to add 50 new stores per year there for the next five years.

Adler acknowledged that CVS' interest in Albertsons is driven mainly by its plans for the West Coast, noting that "California is an attractive market given its large population and CVS' limited presence there."

If CVS does purchase Sav-on and Osco, it would probably be from a company that buys Albertsons for its supermarkets and real estate and spins off the drug stores. The most likely scenario has Albertsons being sold to a private investment firm. Company executives have indicated, however, that it would remain flexible in terms of any potential acquisition and that buying the stand-alone drug stores directly from Albertsons still also is a possible scenario.

CVS is one of several companies whose name has come up in relation to an Albertsons purchase. While some recent speculation has also focused on Tesco, Whalin said he wouldn't be surprised if German retailer Metro enters the picture as a suitor for Albertsons or another U.S. grocer. "I heard a presentation from their [chief executive officer], and they, have big plans to expand and the money to do it, Whalin said.

COPYRIGHT 2005 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.
COPYRIGHT 2008 Gale, Cengage Learning