SHOPKO PLANS TO SELL PROVANTAGE TO MERCK

Byline: Arnold J. Karr

NEW YORK — In a move that would return its focus entirely to retailing, ShopKo Stores has reached a definitive agreement to sell its ProVantage Health Services unit to Merck & Co. for approximately $222 million.
ProVantage, an outgrowth of ShopKo’s substantial involvement in pharmacies and optical centers, was started in 1993 and generated sales of $902.4 million last year, accounting for 23 percent of the Green Bay, Wisc.-based discounter’s sales. Shop- Ko currently holds 64.5 percent of ProVantage’s stock, following a partial initial public offering last year.
“Merck-Medco is a leader in the fiercely competitive pharmacy benefit management industry and possesses the strong capital structure necessary to fund the future growth of Pro- Vantage,” said William Podany, ShopKo chairman and chief executive, in a statement. “This transaction will give ShopKo more time to focus on its core discount retailing business.”
ShopKo’s share of the expected proceeds, about $143 million on a pre-tax basis, would be applied to retailing activities, which expanded greatly last year with ShopKo’s acquisition of Pamida. New store construction, retail acquisitions, stock repurchases and debt reduction are among the possible applications of the funds, the company said.
Under terms of the agreement, already approved by the boards of Merck, ProVantage and ShopKo, a subsidiary of Merck, would commence a tender offer for ProVantage’s shares on May 10 at $12.25 per share. ShopKo expects the acquisition to be completed by the beginning of August. ShopKo’s shares closed at 18 3/4, up 1 5/8, Thursday, while ProVantage closed at 11 7/8, up 4 1/4.
A ShopKo spokeswoman said ShopKo would continue to operate pharmacy and optical centers in all its stores. ProVantage, she noted, “didn’t fit real well with our retailing activities. It began as an embryo from our involvement in pharmacies and became a rapidly growing part of our business.”
The ShopKo shift adds another name to the roster of retailers who have pared or are in the process of paring down their business activities to focus on retailing, multichannel in nature though they may be. J.C. Penney’s stock got a boost early this week when it made public its plans to sell all or part of its direct marketing services unit, which offers insurance products. Those proceeds might be combined with others from a planned IPO of a tracking stock of Penney’s Eckerd drug stores, which currently number more than 2,600. Sears Roebuck & Co. spun off its insurance, real estate and investment assets in the mid-Nineties.
Merrill Lynch & Co. served as ProVantage’s financial adviser and has rendered a fairness opinion to ProVantage’s board.
The health care connection at ShopKo is stronger than even the presence of pharmacies in its stores might suggest. ShopKo was founded in 1962 by James Ruben, a former pharmacist.
ShopKo operates 319 stores in 22 states under the ShopKo and Pamida names.