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Originally published March 24, 2011 at 12:03 PM | Page modified March 24, 2011 at 9:45 PM

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Drugstore.com to be bought by Walgreens for $429M

Founded in 1998, drugstore.com went public during the dot.com heyday of 1999. It never posted an annual profit. Walgreens said it will keep Drugstore.com's corporate offices in Bellevue and operate it as a separate online brand.

Seattle Times business reporter

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Internet retailer drugstore.com, which was founded 13 years ago in Bellevue during the dot.com boom and has yet to turn an annual profit, is being bought by Walgreens for about $429 million.

Deerfield, Ill.-based Walgreens, the nation's largest drugstore chain, said Thursday it will keep drugstore.com's corporate offices and operate it as a separate online brand.

Drugstore.com employs 256 people at One Bellevue Center downtown, where it takes up three of 21 floors.

For now, at least, no pink slips are planned.

"This is really about growth," said Walgreens spokesman Michael Polzin. "We don't anticipate any significant job reductions."

Walgreens will give drugstore.com investors $3.80 in cash for each share, a 102 percent premium over the stock's 30-day average closing price.

Also, it's nearly matching the $456 million in sales drugstore.com rang up last year. That's a robust offer given that Walgreens already has a respectable website and drugstore.com has struggled to become profitable, said Jefferies & Co. analyst Scott Mushkin.

"I wouldn't call it a failure but I certainly wouldn't call it a resounding success," Mushkin said of drugstore.com.

Drugstore.com's stock more than doubled Thursday to $3.81, its highest level in nearly a year. Shares of Walgreens climbed 12 cents to close at $39.95. The deal was announced before the markets opened Thursday.

The deal ends a long and bumpy ride for drugstore.com shareholders. Separately, it marks the second loss of a corporate headquarters on the Eastside this week. AT&T announced plans Sunday to buy Bellevue-based T-Mobile USA for $39 billion.

Founded in 1998, drugstore.com went public during the dot.com heyday of 1999. After opening at $65 a share, its stock hit $67.50 a month later, and it never reached that high again.

At one point, Seattle-based Amazon.com owned about 28 percent of drugstore.com's stock, paying between $3.35 and $28.12 a share in transactions from 1998 to 2000. Today, Amazon owns a 12 percent stake, making it one of the largest shareholders.

Other early backers included Silicon Valley venture-capital firm Kleiner Perkins and Howard Schultz of Starbucks. Amazon.com founder Jeffrey Bezos and Melinda French Gates of the Bill & Melinda Gates Foundation once served on its board.

Walgreens said the purchase, which is expected to be final by the end of June, will add about 60,000 products to its online offerings and give it access to 3 million customers.

Drugstore.com also comes with an array of websites, including Beauty.com, SkinStore.com and VisionDirect.com.

Still, some analysts said they're perplexed by Walgreens' interest in the Bellevue company.

"Supposedly, drugstore.com has brand cachet, yet it has not been able to deliver a financial benefit to shareholders," said Steven Halper, who follows Walgreens for Stifel Nicolaus in New York. "It'll be interesting to see if Walgreens can take the drugstore.com brand and move the needle."

Either way, Walgreens has the cash to pay for the deal. It announced plans this month to sell its pharmacy benefits-management operation to Catalyst Health Solutions for $525 million.

"Walgreens is a $70 billion company, so this is a drop in the bucket for them," Mushkin said. "They'll spend on drugstore.com what they produce in two months of operations."

Walgreens, which has nearly 7,690 stores in the U.S. and Puerto Rico, said the purchase will reduce its fourth-quarter per-share profit by 3 cents.

Tuesday, Walgreens posted a second-quarter profit of $739 million, or 80 cents a share, on sales of $18.5 billion.

Drugstore.com Chief Executive Dawn Lepore would not divulge details about negotiations between the two companies, other than to say, "Walgreens called us. We were not shopping the company."

Drugstore.com last month said its fourth-quarter sales rose 14 percent from a year ago to nearly $124 million. Even so, it posted a quarterly loss of $663,000, citing increased discounting and costly shipping promotions during the holiday season.

Last week, drugstore.com reported an accumulated deficit of about $775 million.

"To date, we have had only four profitable quarters, and we may never achieve profitability on a full-year or consistent basis," the company said Friday in an annual regulatory filing.

Lepore, who joined drugstore.com in fall 2004 and plans to help with the transition, said the e-tailer has made significant progress in the past six years. Last year, it sold its prescription-medicine business to focus on faster-growing categories such as cosmetics and contact lenses, and it bought SkinStore.com operator Salu for $36 million

"Drugstore.com is a great URL. It's a URL many companies wish they had," Lepore said.

Drugstore.com has about 950 employees, counting its Bellevue headquarters, a distribution center in New Jersey, a call center in Nova Scotia and offices in Sacramento, Calif. Walgreens fills most of its Internet orders at a distribution center in Illinois.

"We believe consumers like choice," said Sona Chawla, president of e-commerce for Walgreens, explaining the company's interest in drugstore.com.

"They have an expanded assortment of health, beauty and daily-living products," she said. "They have very strong talent, and part of it is their distribution capabilities and infrastructure."

Walgreens will end up paying $409 million, because it gets drugstore.com's $20 million in cash.

Drugstore.com's board unanimously approved the deal, but its shareholders still must sign off on it.

Besides shareholders, it's a good deal for employees, Lepore said.

"They're going to invest in the overall e-commerce business, so I think there's going to be some wonderful opportunities," she said. "This was a talent acquisition for them."

Seattle Times business reporter Eric Pryne contributed to this story.

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com

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