We promised you'd see some M&A action in the drugstore business before the end of the year, but we didn't predict this morning's news: Duane Reade (NYSE:DRD), which operates 239 stores in the metropolitan New York area, announced plans to be taken private by Oak Hill Capital Partners.

The deal no doubt pleased Duane Reade investors, whose shares are down -- and have underperformed the S&P 500 -- since the company went public in early 1998. They'll get $17 per share in cash, not a huge premium on last night's close at just about $15, but more than 20% above its average close for the last 30 trading days. At any rate, it's real money for a company that's had a rough run.

Duane Reade has certainly grown since going public: With only 67 stores at the time, it now boasts nearly four times that. Sales, which topped out at $281 million in 1994, hit $1.27 billion last year. Net income and EPS, however, have steadily fallen from 1999 levels. Sept. 11, certainly, didn't help -- the company lost two stores and suffered numerous other disruptions to boot.

Generally speaking, a downbeat economic environment has hurt Duane Reade more than anything else. Costs have increased while higher-margin front-end (non-pharmacy) sales have slowed.

Competition, meanwhile, remains fierce in the drugstore business. CVS (NYSE:CVS) and Walgreen's (NYSE:WAG) continue to grow as they fight for national dominance, while Longs (NYSE:LDG), Rite Aid (NYSE:RAD), and J.C. Penney's (NYSE:JCP) Eckerd are among other major players. More M&A activity may very well be on the way in this segment, though perhaps not in 2003.

Duane Reade investors, at least, can relax for now. In the long term, the company may yet deliver for its new owners given its strong presence in its key U.S. market. As a private company, management is now free to run it without the sometimes-needless pressures of the stock market.

Enjoy the glamour of drugstore shopping in the Big Apple? Talk it over on our Duane Reade discussion board.

Dave Marino-Nachison can be reached at dmarnach@fool.com.