Walgreen to Buy USA Drug, Other Store Brands from LaFrance for $438 Million

by Arkansas Business Staff  on Thursday, Jul. 5, 2012 7:39 am  

Stephen LaFrance Sr., chairman and owner of Stephen L. LaFrance Holdings Inc.

Walgreen Co. of Deerfield, Ill., said Thursday that it is buying Stephen L. LaFrance Holdings Inc.'s regional drugstore chain, which includes USA Drug and Super D Drug stores.

The $438 million deal is subject to regulatory requirements and other closing conditions, and is expected to close around Sept. 1. The chain, operated under Stephen LaFrance Pharmacy Inc., includes 144 USA Drug, Super D Drug, May's Drug, Med-X and Drug Warehouse stores in Arkansas, Kansas, Mississippi, Missouri, New Jersey, Oklahoma and Tennessee.

The acquisition also includes corporate offices, a distribution center in Pine Bluff and a wholesale and private brand business. 

The privately owned LaFrance chain recorded sales of $825 million in 2011, according to a Walgreens news release. That's lower than the $1.08 billion estimate by trade journal Chain Drug Review that Arkansas Business used to rank the company No. 7 on its 2012 list of the state's top private companies in May.

(More: An analyst on why Walgreen is buying stores from the LaFrance company.) 

At $438 million, the deal would rank among the biggest involving an Arkansas company in the last year and half. In 2011, only seven deals were larger. It also marks the third sale of company on Arkansas Business' largest private companies list this year. Crackerbox Food Stores of Hot Springs is being sold to Valero Retail Holdings of San Antonio, and Farm Bureau Mutual Insurance Co. of Arkansas Inc. is merging with three other insurance companies.

Walgreen said the deal is structured as a purchase of Stephen L. LaFrance Holdings Inc. stock. The Little Rock-based entity owns most of the business, but the deal also includes assets or stock "of certain affiliated companies or stores and other parts of the business that are not owned by that holding company."

"We chose to sell our business to Walgreens not only because it is the premier drugstore company in our industry, but also because Walgreens will continue to provide our customers with the service and products they have come to expect," Stephen LaFrance, the holding company's chairman and owner, said in a news release.

Future for Stores, Jobs

Walgreen said the LaFrance drug stores will continue to operate under their brand names after the purchase closes and "decisions will be made over time regarding the best, most effective way to harmonize Walgreens and the acquired brands."

In a memo to employees, Joe Courtright, president and CEO of USA Drug, said "it is possible that decisions will be made about job reductions and store closings" and that the company would give advance notice and provide severance benefits.

"These individuals will also be eligible to be rehired as openings occur," Courtright said. "But remember, nothing will happen until the closing around Sept. 1, and we will maintain open channels of communication."

Walgreen (NYSE: %%WAG%%) says it is the nation's largest drugstore chain, with fiscal 2011 sales of $72 billion. The company operates 7,890 drugstores in all 50 states, the District of Columbia and Puerto Rico.

"This acquisition expands our business in an important region of the country," Walgreens President and CEO Greg Wasson said. "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." 

Slumping Sales

The Walgreen purchase of the LaFrance stores comes as the pharmacy giant battles a sales slump driven largely by Walgreen's split with pharmacy benefits manager Express Scripts.

On Thursday, Walgreen reported that revenue from stores open at least a year sank 10 percent last month as generic drug sales and the Express Scripts split continued to hurt business. Walgreen had filled prescriptions for Express Scripts, but their contract expired several months ago.

Last month, Walgreen announced it would pay $6.7 billion for a stake in European health and beauty retailer Alliance Boots.

LaFrance Pharmacy

LaFrance, a Pine Bluff pharmacist, founded Stephen LaFrance Pharmacy in 1968. He retired as president and CEO in 2006.

The LaFrance organization has been dogged by internal scandals. Former CFO John Atwood served less than a year in state prison after pleading guilty to stealing more than half a million dollars through billing fraud that went on from 2001 to 2004.

And in a complex and celebrated case that continues in civil court, Garret Sorensen, a former vice president of marketing, pleaded guilty in federal court in May to routing about $525,000 in advertising commissions through a side company that he set up with his wife and sister-in-law.

Memo to Employees

Joe Courtright, president and CEO of USA Drug, sent the following memo to employees at 7:07 a.m. on Thursday, seven minutes after Walgreens released its official announcement:

As many of you know Mr. LaFrance, after putting himself through college and pharmacy school, started our company on February 26th, 1968 with a single leased pharmacy in a Gibson's Department store.  He began with a lot of debt, and sales for the first day totaled $26.  Over the last 44 years, quite a bit has changed. Today we are the largest privately held pharmacy chain in the United States with 144 stores in seven states.   This growth has come about not only as a result of the vision and work ethic of Mr. LaFrance, but is also due to the outstanding quality of our team members!

Mr. LaFrance set out to build a company that would serve an increasing number of customers that would operate with the highest moral and ethical standards. And he has accomplished that. But, as always, times and business conditions continue to change. After turning 70 last year and after 44 years of ownership, Mr. LaFrance and his family decided it was time to embrace another change. As they looked to the future, they determined that the best way to grow and sustain the business for our employees, our customers and our communities, would be to join another company that shares our vision.

And today, we are announcing that we have found that company in Walgreens, the nation's largest drugstore chain.  An agreement has been reached to sell all of our stores -- USA Drug, Super D Drug, May's Drug, Med-X and Drug Warehouse - as well as our distribution center and wholesale and private brand businesses to Walgreens.

Over the years Walgreens has always been an excellent competitor - and their story is not unlike our own.  Walgreens has been in business since 1901.  Their current CEO is a pharmacist, beginning his career as an intern at Walgreens while attending pharmacy school. Walgreens shares the values and the commitment we have had from the start, operating at the highest ethical standards. We competed with them well over the years through pricing and customer service.  And today, as we look at the competitive landscape, the growth of mail order and the impact of PBMs, Walgreens is the single company that has embraced change to protect the future of our profession. 

With today's announcement, we expect to finalize, or "close," the acquisition around September 1st. It is important to remember that from now until then, it will be business as usual for all of us.  I know many of you will have questions and, as always, I will be very honest in answering them as we move forward.

I know that any sale like this creates some uncertainty. But remember, Walgreens bought our business because they like the stores that we operate, the customers we serve and the employees that make our business work.

As we put our businesses together after the transaction closes, it is possible that decisions will be made about job reductions and store closings. We will provide advance notice and severance benefits to those whose jobs are affected by the transaction.  These individuals will also be eligible to be rehired as openings occur. But remember, nothing will happen until the closing around September 1st and we will maintain open channels of communication.

Members of our leadership team will be working with Walgreens to decide how to best put our companies together. And I will be staying on after the transaction closes to serve as president of USA Drug operations.

We are committed to keeping all of you informed as the process moves forward. If you are asked by customers, suppliers and other partners about the sale, please remind them that it is business as usual until the closing. For any additional inquiries that come your way, please refer them to our USA Drug website, www.usadrug.com, or have them e-mail customerservice@usadrug.com.  

I want to invite members of our headquarters team and our distribution center to hear directly from our executive management and, where possible, Walgreens leadership. There will be an initial meeting today in the USA Drug Retail Corporate office in Little Rock, one at the SAJ Distribution Center in Pine Bluff and one at the Tulsa office, all held at 10 am.  At 2 pm, in the Little Rock office, I will introduce Eric Anglade from Walgreens.  I am sure that the rest of you will have the opportunity to meet these leaders in the coming days, and in the meantime you can find additional information on the USA Drug Intranet home page under the link USA Drug Transition Information.  This informational page will be updated every Thursday as new information becomes available.

In closing, I want to thank all of you for your dedicated service to our business, the LaFrance family and more importantly our customers and our communities. To all of those who have been with us since the beginning and to those who have joined us since 1968, it has been my great pleasure working with all of you.

As always, thanks for all of your hard work!

Joe Courtright, R.Ph

President & CEO

USA Drug



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