RITE AID GOES TO WASHINGTON WITH ACQUISITION OF GRAY DRUG FAIR FROM SHERWIN WILLIAMS; CHAIN ADDING 356 STORES AND $500 MIL. IN VOLUME

Rite Aid is adding $500 mil. in volume and a strong strategic position in the Washington, D.C. market with the purchase of 356 Gray Drug Fair Stores from paint manufacturer and marketer Sherwin-Williams. In a May 1 press release announcing the definitive merger agreement, Rite Aid said that it "anticipates additional revenue of about $500 mil. from the acquisition." Coupled with its reported sales of nearly $1.8 bil. for the most recent fiscal year ended Feb. 28, the Gray Drug Fair acquisition makes Rite Aid a nearly $2.5 bil. operation. The proposed cash deal, valued at $115-120 mil., is "slightly in excess of book value," according to the release, and signals the end of Sherwin-Williams' six-year experience in the retail drug business. Gray Drug Fair, which at the time operated 450 stores in 10 states, was put on the block last July. Rite Aid is entering the D.C. market through the 110 Drug Fair outlets located in the Washington area. The two main competitors in the area, Peoples and Dart, have recently been showing the ill effects of years of intense competition in the D.C. market. An operating loss of $1.2 mil. by Peoples in the third quarter of 1986, compared to a $7.7 mil. operating profit in the comparable 1985 period, precipitated a management shakeup by Canadian parent Imasco. In January, Peoples Chairman Sheldon Fantle abruptly resigned. Imasco subsequently appointed David Eisenberg to take over the chain's day-to-day operations, and announced that the Peoples operation would be more closely managed by the Imasco retail group in Toronto. Dart Drug, suffering from flat sales growth and faced with a projected annual debt service of $28 mil. resulting from an earlier leveraged buyout, is in the process of financial restructuring. Dart has proposed an exchange offer of debt for equity which would take the company public once again. Noting that it sustained a net loss of $15.6 mil. in its most recent fiscal year, Dart emphasized in an SEC filing that "if the exchange offer is not successfully consummated, the company may be forced to seek a reorganization under Chapter 11." The acquisition of the D.C. stores marks the second time that Rite Aid has used Gray Drug Fair as an entry to new markets. In 1986, Rite Aid bought 103 Florida-based Gray Drug Fair units from Sherwin Williams. Prior to its purchase of the Florida stores, Rite Aid had virtually no presence in one of the nation's fastest growing sunbelt markets. The move into the D.C. urban environment represents an exception to Rite Aid's growth strategy, which has emphasized small outlets in small markets. "At least 50% of our future growth will be in smaller markets with population bases of less than 15,000 people," Rite Aid said in its annual report for 1985. "It is our belief that the existing Rite Aid territory can support at least twice as many stores as we operate currently." The Gray Drug Fair D.C. operation includes a number of inner city locations, and many of the stores are larger than Rite Aid's 6,500 sq. ft. average outlet. Rite Aid chairman Alex Grass, speaking at the NACDS annual meeting April 28, predicted that major growth for the chain industry as a whole would come in small- to mid-size markets. At the same time, Gray Drug Fair will give Rite Aid increased exposure in three states where the company already has a signficant presence -- Maryland, Virginia and Ohio. Approximately 300 Gray Drug Fair outlets are in these states, with about half located in Ohio. As of May 1, Rite Aid operated 1,691 drugstores in 22 states. Rite Aid's purchase of the 356 Gray Drug Fair stores follows an aborted attempt by President Carl Bellini to take the chain private through a leveraged buyout late in 1986. The release notes that the transaction, which is subject to regulatory approval, is scheduled to close on June 26.