J.C. Penney Reportedly Begins Eckerd Auction Process

PLANO, TX -- Citing sources close to the company, Reuters reports that J.C. Penney Co. has launched a formal auction for its Eckerd drug store division.

Reuters says it has "no means of verifying this report, as JCP has declined to comment." But reports regarding J.C. Penney's plan to spin off Eckerd in some way have been circulating for some time, including the possibility of an auction, IPO, or sale.

A report from UBS Warburg says there will probably be "few likely bidders." But UBS also points to a recent article in the Montreal Gazette suggesting that Jean Coutu, a Canadian drug retailer with stores in the northeastern part of that country, may be interested in bidding for Eckerd.

UBS Warburg says its "best-case scenario suggests a sum-of-the-parts value of $24 to $26 per share. We calculate this by assuming a operating margin of 3.2 percent for Eckerd (vs. 2.8 percent last year) and 4.6 percent for department stores (vs. 4 percent last year), and applying industry P/E multiples. This implies a equity value of $11 to $13 per share for Eckerd. Our sum-of-the-parts analysis suggests a value of $19 to $20 per share, which has been calculated using our estimates for 2003 operating margin at both divisions."

Clearwater, Fla.-based Eckerd, which represents about half of company sales, has long been considered a poor fit for J.C. Penney, whose department store division specializes in mall-based broadlines sales.
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