UPDATE 3-Rite Aid sells 12 Calif., Idaho stores to Walgreen

Thu Feb 5, 2009 5:45pm EST

(Adds analyst quote, adds closing share prices )

By Jessica Wohl

CHICAGO Feb 5 (Reuters) - Rite Aid Corp (RAD.N) said on Thursday that it would sell seven San Francisco stores and five stores in eastern Idaho to Walgreen Co (WAG.N).

Rite Aid said it expects to close the sale, which will allow it to focus on other competitive areas, by the end of March. The drugstores did not disclose terms of the deal.

"With only seven stores in all of the city of San Francisco, we didn't have the critical mass to be successful there, and our stores in eastern Idaho are just too widespread and too distant from other Rite Aid locations to operate efficiently," said Chris Hall, Rite Aid's senior vice president of strategic business development.

Credit Suisse analyst Edward Kelly questioned whether these sales were just the beginning.

"While this transaction is not material on its own, we believe it indicates that Rite Aid is taking a harder look at its asset base," said Kelly in a note, adding that "more aggressive store closings and asset divestitures are likely" if the chain continues to struggle.

Both chains are trying to keep their edge in a drugstore industry pressured by Wal-Mart Store Inc's (WMT.N) late-2006 introduction of $4 monthly prescriptions on many generic drugs and consumers choosing cheaper alternatives in the recession.

Rite Aid and Walgreen have been updating older stores, opening new ones, closing others and cutting costs. Walgreen also slowed down its historically rapid store opening plans.

At the same time, rival CVS Caremark Corp (CVS.N) became the leader in California when it bought Longs Drug Stores Corp, a deal Walgreen missed out on. CVS now has 925 stores in California, including 455 Longs locations.

Still, CVS has only one Longs store in the city of San Francisco and does not have any stores in Idaho, so the stores Walgreen is buying will not compete directly with CVS.

Walgreen already has 59 stores in San Francisco and 28 in Idaho. Walgreen said it will combine some locations it is buying with its own stores, but did not say how many stores might close.

Rite Aid said it would still have 605 stores in California, including 42 in the Bay Area. It will still have 14 stores in western Idaho. California is Rite Aid's second-largest market, in terms of number of stores, behind New York.

Rite Aid is working on fully absorbing the Brooks and Eckerd chains it bought from Canada's Jean Coutu (PJCa.TO) in 2007. None of the stores being sold were part of that deal.

On the New York Stock Exchange, Rite Aid closed up 1 penny, or 4 percent, to 26 cents, Walgreen rose 1 percent to $27.57 and CVS climbed 4 percent to $28.56. (Additional reporting by Alexandria Sage)

(Reporting by Jessica Wohl, editing by Leslie Gevirtz, Richard Chang)

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