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Executive Summary

The proposed acquisition of Peoples Drug Stores for $330 mil. will extend CVS chain-parent Melville Corp.'s drug store empire from Rhode Island to Virginia. The two chains' 1,301 units together will be the nation's fifth largest with combined sales of almost $3 bil. CVS revenues totaled $1.95 bil. in 1989; Peoples sales were$1.02 bil. In terms of dollar volume, CVS ranked eighth in 1989 among U.S. drug chains and Peoples was 14th. Ranked by 1989 store totals, CVS was also eighth and Peoples was 10th. Melville announced the agreement in principle with Peoples' parent, Imasco Ltd., on June 25. The proposed merger appears to be a good strategic fit. The move expands the Northeast region CVS chain's reach into the booming mid-Atlantic market while tapping into a similar customer base, store location and operational style. CVS (headquartered in Woonsocket, Rhode Island) operates 811 chain outlets in 13 Northeastern states and southern California. The chain's prototype unit ranges from 6,000-10,000 square feet of selling space. Peoples, based in Alexandria, Virginia, has 490 stores and is strong in the mid-Atlantic, particularly Virginia, the District of Columbia, Maryland, Pennsylvania, West Virginia and North Carolina. Units average 9,200-9,400 square feet. Both stores stock over 1,000 SKUs with a core of H&BAs anchored by a strong pharmacy and stores from both chains often include photofinishing facilities. Both CVS and Peoples have an in-house value brand and both chains' units mix freestanding and attached, urban and suburban locations. CVS President Harvey Rosenthal said that he expects Peoples will continue to operate within CVS as a distinct unit. Because the merger deal is still in the agreement-in-principle stage, both companies declined to comment on how management functions would be structured after the acquisition. The deal is expected to be completed in August pending the signing of a definitive agreement and approvals from the U.S. and Canadian governments. Peoples President David Eisenberg has been the chain's top exec since the 1987 resignation of Sheldon Fantle, who later led a buy-out group of Dart Drug and renamed the firm "Fantle's." Fantle is generally credited for turning Peoples around prior to its 1984 acquisition by Imasco. In the Imasco years, Peoples again had a period of decline attributable, in part, to an unsuccessful strategy of expanding product offerings beyond traditional drug store fare. A loss in the third quarter of 1986 precipitated Fantle's resignation, Eisenberg's succession and the initiation of more direct operational oversight by Imasco. The decline culminated in 1987 with a net loss of $23 mil. Peoples recorded a loss of $2.5 mil. in 1988. Recently, Imasco has restructured Peoples, downsizing the chain via divestitures of 40% of its outlets and using the money to modernize the remaining stores. Point-of-sale scanning, for example, is now in 150 of the units. The restructuring helped operating profits for 1989 rebound to $12.5 mil. Last year, the 85 stores of Peoples' Reed Division were sold to Big B for $50 mil. ("The Pink Sheet" Jan. 23, 1989, T&G-14). Lane's 114 units were sold to Rite Aid for an undisclosed sum on April 10 and 112 midwest Peoples outlets were sold in June 1989 to a group that later became Reliable Drug Stores. In comparison, CVS' aim has been to open 50-60 stores per year. Although the configuration of Peoples has changed a great deal since the 1984 purchase by Imasco -- then it had 598 units with sales of $791 mil. -- Melville's proposed price is only $10 mil. more than Imasco paid for the chain. In 1984, the price for Peoples' was 23 times net earnings and 0.4 times 1983 sales. Melville's price is over 26 times operating profits and 0.3 times sales. Melville said the acquisition will be financed from operating cash flow and existing credit lines. Based in Rye, N.Y., Melville controls specialty retailer operations with sales last year of $7.5 bil. and earnings of $398 mil. Melville also operates the small deep discount drug store chain Freddy's, Marshalls, Wilsons, Chess King, Meldisco, Thom McAn, Kay-Bee Toy, Linens 'n Things and This End Up. With the sale of Peoples, Imasco still retains Canada's largest drug store chain, Shoppers Drug Mart, which had 1989 sales of $2.6 bil. (Canadian) from 633 units.

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