Walgreen Co. plans to purchase regional drug chain USA Drug in a $438 million deal that will add 144 drug stores in seven states, primarily in the Mid-South and Great Plains.

Walgreens, USA Drug, acquisition, Greg Wasson, Joe Courtright, Stephen LaFrance, Stephen L. LaFrance Holdings, drug stores, Super D Drug, May’s Drug, Med-X, Drug Warehouse, Milly's Pharmacy, drug store sales, regional drug chain, William Blair & Co., Mark Miller, pharmacy, Geoff Walden

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Inside This Issue - News

Walgreens to buy USA Drug for $438 million

July 16th, 2012

DEERFIELD, Ill. – Walgreen Co. plans to purchase regional drug chain USA Drug in a $438 million deal that will add 144 drug stores in seven states, primarily in the Mid-South and Great Plains.

The acquisition, announced earlier this month, includes corporate offices, a distribution center in Pine Bluff, Ark., and a wholesale and private brand business. USA Drug posted sales of $825 million in 2011.

“This acquisition expands our business in an important region of the country,” said Walgreens president and chief executive officer Greg Wasson. “It will provide significant new pharmacy business for us in this region while also enabling us to bring the Walgreens experience to many additional smaller communities where USA Drug has developed strong operational expertise.”

The deal covers outlets operating under the USA Drug, Super D Drug, May’s Drug, Med-X and Drug Warehouse banners in Arkansas, Kansas, Mississippi, Missouri, Oklahoma and Tennessee, as well as Milly’s Pharmacy in Camden, N.J.

Two years ago Walgreens bought the pharmacy files of 17 Super D and Ike’s units in Memphis from USA Drug, as well as purchasing two Ike’s stores outright. Walgreens’ share in Memphis, the No. 38 market in the country, was 57% in 2010.

USA Drug that year had a 17% share of drug store sales in Little Rock/North Little Rock/Conway, Ark., good for third place. Walgreens led the market with a 38% share, followed by Walmart’s 22%.

In Tulsa, where USA Drug operated May’s and Med-X units after purchasing those chains in 2004, it had a 24% share, second to Walgreens’ 38%.

Most recently USA Drug has focused on enhancing established stores. The company last year doubled its capital expenditures, allowing it to build eight stores and remodel several others. The retailer added outlets in Malden and Dexter, Mo.; Dyersburg, Tenn.; Moore, Okla.; Osceola, Ark.; and Stillwater and Shawnee, Okla.

At the same time the chain has focused on its home market, completing the renovation of all of its stores in Little Rock. “We’re seeing very large increases there,” president and chief executive officer Joe Court­right said in the spring.

Any doubts about the change in strategy were erased by February’s 13% same-store sales growth. “You hate to write those checks when you’re making all those capital expenditures,” remarked Courtright, “but you like seeing when they pay off.”

The retailer also has seen success from the expansion of its Select Brand private label. It is also getting good results from its automated planogram compliance program.

Stephen LaFrance, owner and chairman of USA Drug parent Stephen L. LaFrance Holdings Inc., commented, “What is now USA Drug began from a single store I opened in Pine Bluff in 1968 and has grown to more than 140 stores in seven states. We chose to sell our business to Walgreens not only because it is the premier drug store company in our industry, but also because Walgreens will continue to provide our customers with the service and products they have come to expect.”

The transaction is structured as a purchase of the stock of Stephen L. LaFrance Holdings, which owns most of the acquired business, and also includes the purchase of assets or stock of certain affiliated companies or stores and other parts of the business that are not owned by the holding company.

The acquired stores will continue in the near term to operate under their current names, with decisions made over time regarding the best, most effective way to harmonize Walgreens and the acquired banners.

The deal is subject to satisfaction of regulatory requirements and other closing conditions, and is expected to close around September 1. Walgreens expects that the transaction will not have a material impact on earnings per share in fiscal 2012.

More acquisitions of U.S. drug stores and pharmacy files by Walgreens should be expected, says William Blair & Co. analyst Mark Miller.

“PBM consolidation and reimbursement pressures have created added incentive for many of these operators to sell, and Walgreens’ procurement advantages with generics increases the earnings synergy potential," Miller writes in a research note. "While the jury is still out on the Alliance Boots estimates, and it will take years to weigh the trade-offs, the USA Drug acquisition is a no-brainer.”