Leonard Green Tries To Resuscitate Rite Aid –

What a roller coaster ride.

Turnaround specialist Leonard Green & Partners took on quite a load when it invested $300 million, approximately one-fourth of its third fund, in ailing drugstore chain Rite Aid Corp. in late October, closing the deal just two weeks after the resignation of the company’s chief executive and two weeks before the announcement of an accounting scandal that caused the company’s accounting firm to quit.

The investment gives Leonard Green preferred shares representing 9.7% of the company and two of 11 board seats. The firm purchased 3 million shares of convertible pay-in-kind preferred stock for $100 per share. The initial conversion price is $11 per share, but it would drop to as low as $7.50 if the company performs poorly.

The deal closed once amendments to the company’s existing bank credit facilities, which extended the expiration of the company’s $1.3 billion credit agreement that was due Oct. 29 and a $300 million bank loan to Nov. 1, 2000, became effective.

Partners at Leonard Green & Partners did not return calls for this article.

With his firm’s investment, Leonard Green, founding partner of Leonard Green & Partners, was added to the board of Rite Aid and temporarily stepped in as chairman upon Martin Grass’ resignation, remaining in the position for just more than a month before hiring a whole new management team the first week of December, including new chairman and chief executive Robert Miller, who previously held top positions at supermarket chains Kroger Co. and Fred Meyer Inc.

But installing fresh executives only begins to straighten out Rite Aid’s host of problems, which include allegations of financial mismanagement and class action lawsuits.

Bad Medicine

Many of the debt-ridden company’s troubles started after its 1996 purchase of West Coast drugstore chain Thrifty PayLess Holdings, Inc. for $1.4 billion, which led to the assumption of $890 million in debt. Rite Aid bought the stores from Leonard Green & Partners, which had owned them since 1992. Additionally, Rite Aid in January acquired PCS Health Systems, a pharmacy benefits management company, for $1.5 billion.

In March and May, shareholders brought lawsuits against Rite Aid, accusing it of failing to warn of earnings losses and of inflating sales by under-paying distributors.

The Thrifty PayLess and PCS acquisitions were part of a rapid expansion plan headed by former chief executive Martin Grass, the son of Rite Aid’s founder. Grass was in office from early 1995 until he was forced out Oct. 18 amid accounting problems that became public the day before, as the company announced it would have to restate downward its pre-tax earnings for the past three fiscal years by approximately $500 million.

Rite Aid’s accounting firm, KPMG Peat Marwick, quit Nov. 11, saying it could not rely on financial information provided by Rite Aid. Soon after, the Securities and Exchange Commission launched a still-ongoing investigation of the company’s accounting and another top executive, Beth Kaplan, left the company, thus leaving Leonard Green with some major decisions.

Searching for a management team, Green reportedly first approached David Jessick, chief financial officer for Thrifty PayLess until Rite Aid bought the chain, asking him to help straighten out the company’s finances. Jessick, who did not immediately take the job, called Miller, who in turn called Mary Sammons, a 26-year Fred Meyer employee, and John Standley, Fred Meyer’s former chief financial officer. The group became Rite Aid’s new management team this month with Jessick and Standley focusing on the financial picture and Miller and Sammons turning their attention to marketing and merchandising, especially on the West Coast.

Before the new management team was hired, Rite Aid had reportedly been planning to sell PCS and as many as 350 of its West Coast stores, which are more than twice the size of traditional Rite Aid stores, but has since decided to hold on to the stores and sell PCS.

Analysts say Leonard Green may have conquered the most difficult task among Rite Aid’s problems by solidifying a management team.

The company has hired Deloitte & Touche as its accountant and law firm Swidler Berlin Shereff Friedman LLP to conduct an independent investigation of financial matters.

Rite Aid, based in Camp Hill, Pa., is the nation’s third largest drugstore chain, behind Walgreen Co. and CVS Corp. in sales.

Rite Aid’s stock price closed at $12.625 at press time, up from $4.50 per share in October, but down from a 52-week high of $50 per share in January.