Walgreens, Rite Aid Reduce Deal Price -- 5th Update
31 January 2017 - 11:13AM
Dow Jones News
By Austen Hufford and Sharon Terlep
Walgreens Boots Alliance Inc. and Rite Aid Corp. agreed to
reduce the amount Walgreens would pay for its rival by at least $2
billion, after the two companies struggled to get antitrust
enforcers to bless the big drugstore deal.
The companies said Monday they would look to sell more stores as
they seek to satisfy regulators at the Federal Trade Commission,
which has been reviewing the combination. The process may take up
to six months, they said.
Shares of Rite Aid tumbled 17% to $5.72 on Monday. Walgreens
shares barely budged.
Walgreens in October 2015 agreed to buy Rite Aid for $9 a share,
or about $9.4 billion, to form a drugstore chain with more than
10,000 U.S. stores. FTC officials had raised concern that such a
big company could hold too much sway in negotiations with
pharmacy-benefits managers like CVS Health Corp.'s Caremark or
Express Scripts Holding Co., which handle corporate and government
drug plans.
Walgreens and Rite Aid tried to satisfy FTC officials in the
fall by agreeing to sell 865 stores to regional chain Fred's Inc. ,
which would borrow heavily to fund the transaction.
The companies on Monday said they may sell a total of up to
1,200 of Rite Aid's 4,600 stores -- but it is unclear how easily
they could find a buyer that satisfies regulators.
On Monday, Walgreens and Rite Aid extended the deadline for
their agreement until the end of July. That delay will give them
time to find a buyer for any divested stores but could also mean
the companies will be dealing with different officials at the
FTC.
President Donald Trump has designated Republican Maureen
Ohlhausen as acting chairman of the FTC. She could use her new role
to select a new head of the FTC's bureau of competition, which
makes recommendations on merger approvals. The president also is
expected to nominate two additional Republican commissioners to
fill longstanding vacancies.
Leerink analyst David Larsen said the deal has better odds of
being approved by a Republican-controlled FTC.
"We're going to see CVS and Walgreens compete even more
effectively and it's possible the Republicans will understand this
and see the value in it," he said.
An FTC spokesman declined to comment.
Under the new terms announced Monday, the deal would value Rite
Aid at between $6.8 billion and $7.4 billion, depending on how many
stores the pair ends up divesting. The per-share value of the new
deal will range from $7 per share if 1,000 locations or fewer need
to be sold, to as low as $6.50 per share if 1,200 store
divestitures are required.
Private-equity firm Cerberus Capital Management LP was
interested in acquiring the stores ultimately sold to Fred's,
people familiar with the matter said. The stores would have become
part of the Albertsons Cos. grocery chain, owned by a Cerberus-led
group of buyout firms.
The companies worried antitrust regulators wouldn't sign off on
a private-equity buyer and opted for Fred's despite a lower price,
one of the people said. Cerberus hasn't spoken to Walgreens since
those deal talks, the people said.
Both Rite Aid and Walgreens -- which has about 8,200 stores --
have a major presence in California, New York and Massachusetts,
while in other states, including Florida, Texas and Illinois, there
isn't any overlap.
The FTC has increased its scrutiny of buyers of divested assets
since a high-profile settlement in 2015 quickly went sour. In that
matter, the FTC allowed a the acquisition of supermarket operator
Safeway Inc. by the owner of rival Albertsons after the companies
agreed to sell 168 stores, mostly to a small grocery chain, Haggen
Holdings LLC.
Haggen struggled with the expansion and filed for bankruptcy
protection in a matter of months. Albertsons eventually bought back
some of the stores the government had required it to sell.
For Fred's, the Rite Aid transaction would more than double the
size of the Memphis, Tenn., company, which has about 650 stores. It
had a market capitalization of about $400 million before it agreed
to borrow $1.65 billion to fund its Rite Aid deal. The chain has
pledged nearly all its assets as collateral for the loans.
Fred's said Monday it continued to work the FTC as well as Rite
Aid and Walgreens to complete its transaction, and it was willing
to buy more than 865 stores. The companies haven't disclosed which
locations will be sold to Fred's.
At a meeting with investors last week, Walgreens Chief Executive
Officer Stefano Pessina said the companies were discussing "all
instruments and actions" they could put in place to win approval
from the FTC.
Walgreens on Monday lowered its earnings forecast for 2017 due
to the deal's delay. The company said in a filing that it now
expects adjusted net earnings per share of $4.90 for the year
instead of $5.08, since the company won't realize cost savings from
the acquisition this year and because it may have to divest more
stores.
Write to Austen Hufford at austen.hufford@wsj.com and Sharon
Terlep at sharon.terlep@wsj.com
(END) Dow Jones Newswires
January 30, 2017 18:58 ET (23:58 GMT)
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