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DRUG CHAIN MERGERS CONTINUE IN FIRST HALF OF 1985 AS DOES STOCK APPRECIATION; BOTH COOL OVER LAST SIX MONTHS; COMPOSITE AVERAGE REBOUNDS AFTER LACKLUSTER 1984

Executive Summary

The merger and acquisition activity that characterized the Chain Component of the "F-D-C" Weekly Index in 1984 continued unabated through the first half of 1985. In contrast to last year's flat performance, however, the Component rose with the overall bull market, closing out 1985 23.2% ahead of its 1984 mark. The first half of 1985 saw several major chain acquisitions, including the purchase of Payless N.W. by Kmart and Hook Drugs' merger with the Kroger supermarket and drug chain. Both of those deals were examples of an established trend toward the takeover of drug chains by diversified retailers. However, the merger and acquisition pace slackened during the second half, and coincided with an overall softening of drug chain stock prices during the same period. An illustration of the cooling of the acquisition fever in the chain segment in the latter part of the year is Pantry Pride's apparent difficulty in finding a buyer for Adams Drug. Pantry Pride purchased Adams for $100 mil. in 1984, and controlled the chain through the first half of 1985. Just before its extended hostile takeover of Revlon began during the fall of 1985, Pantry Pride declared in a July prospectus that it was actively seeking to dispose of substantially all of its assets and businesses in order to acquire new ones. Despite the company's need for cash during the Revlon battle, however, Pantry Pride was not able to divest Adams. Overall, eight of the ten Index chain issues gained and two lost ground during 1985. While Rite Aid's 1.9% gain was the lowest among advancing stocks, reflecting in part flat earnings, the drug chain nevertheless showed with the Hook offer that it was ready to make an acquisition move if the right opportunity arose. With its 1984 billion dollar takeover of the Jewel food/drug store operation in place, American Stores created a 648-store coast-to-coast super drugstore chain under the Osco name in 1985. To Wall Street the consolidation was super. Despite the firm's reported flat earnings for the first nine months, the stock advanced nearly 25 points, a 62% increase, making American Stores the 1935 jewel among Chain issues. The threat of an unfriendly takeover move against Jack Eckerd sparked a series of events leading to the October proposal by a management group to take the Florida-based chain giant private in a leveraged buyout. The deal, still pending at the end of the year, would be valued at about $1.2 bil., the largest chain drug buyout ever. Walgreen topped the $3 bil. sales mark in fiscal 1985, achieving double-digit earnings growth in the process. The Chicago-based chain opened over 100 new stores during the year, and at the same time showed a strong performance in the stock market, rising 25% on a 5-5/8 gain to 28-1/8. Walgreen also acquired the 26-store, Indiana-based Ribordy chain in September. Charts omitted.

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