Tuesday, July 18, 2000 | 10:32 a.m.
CAMP HILL, Pa. -- Rite Aid Corp. plans to sell its PCS Health System Inc. subsidiary to a Texas health-services company for $1 billion, a move cheered by some analysts as key to reducing the troubled company's heavy debt.
But that wasn't enough to calm jittery investors reacting to an earnings restatement released last week that indicated the Camp Hill-based chain is in more serious trouble than previously apparent.
Shares closed down $1.625 cents, or 21 percent, at $6 Wednesday in heavy trading on the New York Stock Exchange. By Monday of this week, the shares were down to $4.94.
"The stock is down because I believe people did not expect the (earnings) restatement to be so large," said Sirine Hafez, an analyst with the Center for Research and Analysis in Rockville, Md. "To get optimistic about Rite Aid's future, we have to see more concrete results."
Analysts were heartened by news of the PCS sale, however. The nation's third largest drugstore chain had been trying for months to sell PCS, one of the nation's largest drug-management companies. Rite Aid purchased the company for $1.5 billion in January 1999 from Eli Lilly & Co.
"This is very good news," said Eric Bosshard of the Cleveland-based Midwest Research. "While they are selling it for less than they bought it, this allows them time to pay off a substantial amount of debt."
Under the deal announced Wednesday, Advance Paradigm Inc. will pay Rite Aid $675 million in cash and provide Rite Aid with $200 million in senior subordinated notes. Advance Paradigm will also issue Rite Aid $125 million in new equity.
The boards of both companies have approved the transaction, which is anticipated to close in the quarter ending Sept. 30.
"We are very pleased with the agreement reached with Advance Paradigm," said Robert G. Miller, Rite Aid chairman and chief executive officer. "Selling PCS is another step forward in Rite Aid's turnaround because it allows us to substantially improve our financial position by reducing debt."
The acquisition will make the Irving, Texas-based Advance Paradigm the nation's largest provider of health improvement services, serving about 75 million Americans.
"Both companies are focused on helping health plan sponsors measure and improve health outcomes while controlling drug and related health care costs," said David D. Halbert, Advance Paradigm's chief executive. "Together, we immediately achieve the scale necessary to deliver increased value to our customers in the new economy."
On Tuesday, cleaning up an accounting debacle that drove its stock down 80 percent over the past year, Rite Aid revised its 1997 and 1998 results lower by more than $1 billion. It also reported a wider loss in the fiscal first quarter and for the previous year.
Rite Aid, with about 3,800 store locations in 30 states, has been rocked with difficulty after financial woes and accounting troubles in recent months. Former top executive Martin L. Grass was ousted Oct. 18, the day the company announced it was switching auditing firms and restating its earnings for the previous three years because it could no longer provide reliable profit forecasts.
Meanwhile, Rite Aid has been struggling under about $6 billion in debt, due mostly to an acquisition spree under Grass that included purchases of the West Coast-based Thrifty PayLess for $2.3 billion and PCS Health Systems.
Since then, a new team installed in December and led by Miller pledged stricter financial controls and better marketing as part of its turnaround strategy. It recently secured a new financing pact, including $1 billion in secured credit, to give it breathing room to repay debt and pay expenses.
Miller attributed recent problems to the old management's store expansion program and lax inventory control and said the troubles should not continue under his management.
"We have a tremendous team and we have great people in the stores, modern stores and modern systems," Miller said. "We have a big opportunity going forward."
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