Edith Ramirez, the chairwoman of President Obama’s Federal Trade Commission, will soon decide if the proposed acquisition of Rite Aid Pharmacy by Walgreens will go ahead, despite questions about whether both companies will be able to meet the deal’s conditions defined by the FTC when the $9.4 billion acquisition was first allowed to proceed in October 2015.
At that time, the FTC specified that either Walgreens or Rite Aid would have to sell at least 650 of their locations in order to placate antitrust concerns the government had, particularly in markets where Rite Aid and Walgreens are the only major drugstore choices.
Now, it appears that Rite Aid may have a deal to sell 865 of its locations in a separate deal worth $950 million, but it’s unclear if the FTC will allow the sale to go through. If the acquisition of Rite Aid by Walgreens is allowed, the combined firm would be the largest drugstore chain in America, surpassing current top industry player CVS with a mammoth 46 percent market share. Currently, Walgreens stands at number two in the marketplace, and Rite Aid is number three.
Deerfield, Illinois-based Walgreens already acquired the international Swiss-based pharmacy firm Alliance Boots in 2014; technically the full name of the company is Walgreens Boots Alliance. The company was founded in 1901 in Chicago, Illinois and has 8,177 Walgreens stores in the United States, including in all 50 states, the U.S. Virgin Islands and Puerto Rico.
Rite Aid was founded in 1962 in Scranton, Pennsylvania and is now headquartered in East Pennsboro Township in that state. The chain experienced rapid growth, growing to 267 locations in some 10 U.S. states a mere decade after its first store opened. Today, the chain boasts 4,570 locations.
The company that Rite Aid wants to sell its 865 locations to is a much smaller chain of pharmacies called Fred’s, which has just 648 stores. The Rite Aid locations would more than double Fred’s size, and it’s unclear if Fred’s will be able to take on the debt needed to finance the purchase.
Similar deals have collapsed disastrously when previous mergers were obliged to go through regulatory hoops mandated by the FTC. For instance, in 2015, the supermarket chain Albertsons was allowed to buy the smaller chain Safeway for $9.2 billion, contingent on Albertsons selling 146 of its Western division stores to a third firm named Haggen. After the deal closed, Haggen went bankrupt, putting thousands of people out of work. Obviously, the FTC is not anxious for a repeat of this scenario.
Originally, the 865 Rite Aid store sales were supposed to be a package deal sold to three companies, but of the three, only Fred’s remains interested in the locations. If Rite Aid’s deal with Fred’s is consummated, the Rite Aid stores that are sold would continue to operate under the Rite Aid brand name during a defined transition period.
After the deal with Fred’s was announced, Rite Aid stock climbed by five percent to $8.61 — nearly the $9 purchase price of the Walgreens acquisition. But in the wake of uncertainties about Fred’s financing and FTC approval of both deals, the stock fell to $8.39 as of December 23.
Rite Aid reported weak third-quarter results, meaning that the locations it wants to sell off may or may not be profitable, which is all the more reason a buyer for the stores needs to be on solid financial ground itself.
As for Walgreens, the company says it expects to realize more than a $1 billion in efficiency cost savings over the next three to four years if the aforementioned deals go through. Walgreens has said it hopes the transactions will be finalized in early 2017.
Even though all the associated business parties want to complete the above two deals, the FTC may prove to be too tough a stumbling block to overcome. Last year, the agency nixed a different deal — the proposed acquisition of business supply store Office Depot by category competitor Staples.
A judge in a court case related to that transaction was critical of the FTC’s decision. “They are on the pin of enforcement, and that is where you make mistakes,” declared Herbert Hovenkamp, a known antitrust authority and professor of law at the University of Iowa.
In an analyst report, JPMorgan said it was reducing its EBITDA (earnings before interest, taxes, depreciation and amortization) estimate for Rite Aid by approximately 16 percent. Walgreens is being advised by Bank of America Merrill Lynch on the acquisition while Rite Aid is being advised by Citigroup.
Regards,
Ethan Warrick
Editor
Wealth Authority
