Walgreens to buy rival drugstore Duane Reade

NEW YORK (CNNMoney.com) -- Walgreen Co. announced Wednesday it is buying New York-based rival drugstore chain Duane Reade Holdings Inc. to expand its reach in the metropolitan area.

The $1.1 billion cash transaction, which includes some debt and is pending regulatory approval, is Walgreen's largest retail acquisition to date and is expected to close in the current fiscal year ended Aug. 31.

Through the deal, Deerfield, Ill.-based Walgreens (WAG, Fortune 500) drugstore, which currently operates 70 stores in New York City out of 7,100 nationwide, will acquire all 257 Duane Reade locations in New York City, as well as its corporate office and two distribution centers.

"Duane Reade is a compelling strategic acquisition that will immediately provide Walgreens with a leading position in the largest drugstore market in the United States," said Walgreens chief executive and president Greg Wasson in a statement. "The transaction is consistent with the capital allocation objectives we outlined last fall, which included investing in strategic opportunities that reinforce the company's core strategies and meet return requirements."

The deal will also give Walgreens an edge over its national rival CVS Caremark (CVS, Fortune 500), which operates just over 7,000 drugstores across the nation.

"Walgreens lags its rival CVS in the New York metro area," said Craig Johnson, retail industry expert and president of retail consultancy Customer Growth Partners. "So this deal now allows Walgreens to leapfrog over its competitor and give it the kind of dominance in New York City that it has in Chicago, where it is headquartered."

Duane Reade, owned by private equity firm Oak Hill Capital Partners, boasts the highest sales per square foot in the retail drugstore industry in the nation, and its sales reached an unaudited $1.8 billion in 2009.

"We are very pleased that this national leader has recognized the successful transformation under way at Duane Reade," said Duane Reade chief executive and chairman John Lederer in the statement.

Customer Growth Partners' Johnson said the deal will also benefit shoppers.

"This is also a win-win for consumers. Walgreens is bringing the skill, capital and management strength of one of the top two pharmacies operating in the country to Duane Reade," he said. "This will certainly enhance the merchandise and shopping experience for Duane Reade consumers."

Duane Reade, which opened its first location on Broadway between Duane and Reade streets in Manhattan in 1960, will continue to operate under its name after the transaction closes. About 60% of Duane Reade stores are located in Manhattan, while 30% are in outer boroughs and 10% are outside the city.

Though Walgreens expects acquisition charges will lower its earnings per share during the first 12 months after the deal closes, the drugstore projects it will help cut costs by between $120 million and $130 million by the third year.

Shares of Walgreens fell 1% in early trading.