Commentary

Walgreens Cuts Rite Aid Deal In Half To Get By Regulators

Sometimes the best-laid plans run into the immovable object known as antitrust regulations. And so it is that Deerfield, Ill.-based Walgreens Boots Alliance will be acquiring about half of Camp Hill, Pa.-based Rite Aid’s 4,600 storefronts — as well as three distribution centers — instead of swallowing up the company in its entirety. The cost at checkout: $5.18 billion, plus a $325 breakup fee.

When the initial $9.5 billion deal was announced in October 2015, the chains “expected to sell no more than 500 stores to appease regulators, but that eventually was pushed to 1,200 stores,” reports the Associated Press. “The combination of Walgreens, the largest U.S. drugstore, and Rite Aid would have created a drugstore giant with more than 11,000 stores nationally, even with the sale of more than 1,000 stores. That would have been a few thousand more than the nearest competitor, CVS Caremark.” 

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The 2,186 stores that will eventually carry Walgreen’s signage are based in the Northeast, mid-Atlantic and Southeast, reports CNBC’s Lauren Thomas. “Walgreens has also terminated a related deal to sell 865 Rite Aid stores to Fred’s, which sent Fred's shares plunging 27% in premarket trading Thursday,” Thomas writes.

“The new agreement may be a way to finally satisfy the U.S. Federal Trade Commission. The FTC had been reviewing the original takeover and reportedly expressed skepticism that there would be enough competition left in the drugstore market, even with a plan to sell as many as 1,200 Rite Aid stores to Fred’s,” writes Robert Langreth for Bloomberg.

“Consumer advocates gently welcomed the development, saying the original accord would have given Walgreens too much pricing power but cautioning that the new deal may still require oversight scrutiny,” reports Nathan Bomey for USA Today. “‘This merger would have led to higher prices,’ former FTC policy director David Balto said. ‘It's important to preserve three national competitors. That’s in essence what the FTC was saying.’”

But the deal is really no victory for the FTC, observe Reuters’ Siddharth Cavale and Diane Bartz. “In fact, Walgreens' plan to buy 2,186 Rite Aid stores accomplishes many of the same goals as the merger — including eliminating Rite Aid as a rival — but does so in a way that makes it harder for the FTC to take the companies to court to stop the transaction, antitrust experts said,” they write. 

“Based on Walgreens’ understanding of the FTC’s concerns about their original deal and their proposed divestiture, the revised deal is likely to be in local areas where Walgreens knows the FTC doesn’t have concerns and Rite Aid has certainty that the deal will close,” Norman Armstrong Jr., a partner at the law firm King & Spalding who specializes in antitrust, tells the New York Times’ Michael J. de la Merced and Chad Bray.  

As for Rite Aid, its “future is going to be bleak after they sell these stores. This is still going to raise some serious questions. It's still taking out a major competitor,” David Balto, an antitrust lawyer who had worked with groups opposing the takeover, tells them.

“Clearly they (the companies) know what the FTC concerns are. They have likely worked around those issues, which has to be very frustrating for the FTC,” adds Andre Barlow, an attorney with Doyle, Barlow and Mazard PLLC. 

Rite Aid’s future certainly looked bleak to investors yesterday. Its shares plummeted 26.5% Thursday on the news. 

Analysts generally saw the new deal as a victory for Walgreens. “With the new agreement [Walgreens] will still gain incremental scale and volume to optimize efficiency, as well as 70% [to] 80% of the geographic coverage of the merger,” Charles Rhyee, senior equity analyst at Cowen & Co., writes in a research note cited by the Wall Street Journal’s Richard Teitelbaum.

“This new transaction extends our growth strategy and offers additional operational and financial benefits,” Walgreens executive vice chairman and CEO Stefano Pessina says in the statement announcing the deal. “It will allow us to expand and optimize our retail pharmacy network in key markets in the U.S., including the Northeast, and provide customers and patients with greater access to convenient, affordable care.”

Despite some analysts’ predictions to the contrary, Pessina “dismissed the probability of Amazon quickly expanding into the pharmacy market like it's doing in supermarkets with its $14.6 billion bid for Whole Foods,” writes Robert Reed for the Chicago Tribune

“I don't believe Amazon will be interested in the near future, in the next few years,” Pessina said when he was asked about the potential threat during Walgreen’s third-quarter analysts’ call yesterday. “They have so many opportunities around the world, and in many other categories, which are much, much simpler than health care, which is a very regulated business.”

Just ask poor Martin Shkreli.

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