Walgreen Acquires Duane Reade

(Walgreen-Duane Reade article updated with analyst commentary.)

DEERFIELD, Ill. ( TheStreet) -- Walgreen ( WAG) announced on Wednesday that it has purchased New York-based drugstore Duane Reade for $1.08 billion, and analysts have begun to weigh in with their take on the upshot of the deal.

The consensus of one: layoffs are coming.

The purchase will add 275 Duane Reade stores to Walgreen's portfolio. The deal also includes the assumption of $457 million in Duane Reade's debt.

The deal is expected to close this fiscal year, which ends Aug. 31.

"Duane Reade is a compelling strategic acquisition that will immediately provide Walgreens with a leading position in the largest drugstore market in the U.S.," said Walgreen President and CEO Greg Wasson. "In addition, Duane Reade's recent initiatives in urban retailing, customer loyalty and private brand products support and accelerate Walgreens strategy to enhance the customer experience in our network of more than 7,100 stores across the country."

Walgreen already has 70 stores in the New York City area -- and IBISWorld analyst Tonn van Beeck says this means there will inevitably be job losses and store closures, as Walgreen eliminates duplicate corporate positions and gets rid of competing stores.

The deal is expected to dilute Walgreen earnings per share through the next 12 months, but will cut costs between $120 million and $130 million by the third year.

Duane Reade, which is the largest drugstore chain in the New York area, had unaudited net sales of $1.8 billion in the 12 months ended Dec, 26, 2009. It will continue to operate under its brand name after the transaction closes.

Duane Reade is a perfect fit for Walgreen as it has implemented similar customer-centric strategies as Walgreen has in recent years, van Beeck says. While there is a bit of debt involved, Walgreen has enough cash to avoid any major problems.

Walgreen has been predominantly focused on organic growth, but in order to expand in the crowded New York market an acquisition was necessary, van Beeck says.

Duane Reade was taken private by Oak Hill Capital Partners in July 2004, when the firm purchased the drugstore for about $700 million.

-- Reported by Jeanine Poggi in New York.

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