Walgreens Trims Rite Aid Deal After Antitrust Concerns -- 3rd Update
29 June 2017 - 11:33PM
Dow Jones News
By Anne Steele and Sharon Terlep
Walgreens Boots Alliance Inc. and Rite Aid Corp. nixed their
$9.4 billion merger agreement, which had been heavily scrutinized
by antitrust regulators, and reached a new deal in which Walgreens
instead will buy half of Rite Aid's stores for $5.18 billion in
cash.
Investors had been awaiting a government decision on whether the
delayed tie-up between the drugstore chains would go through and
had grown increasingly uneasy that the deal could fall apart.
In a statement, Rite Aid said the decision to spike the previous
deal comes after it received feedback from the Federal Trade
Commission that the merger likely wouldn't have gotten government
approval.
Among the antitrust concerns was that the resulting drugstore
giant -- which would have challenged CVS Health Corp. -- would have
been able to bully pharmacy-benefit managers steering corporate and
government drug plans. The deal was announced in October 2015.
The new transaction terminates the previous deal, as well as
Rite Aid's agreement to sell some of its stores to Fred's Inc.
Walgreens will pay Rite Aid a $325 million termination fee. The new
deal represents about 48% of the 4,523 stores Rite Aid operated as
of the end of the first quarter.
Upon closing, Walgreens will start acquiring the Rite Aid
stores, three distribution centers and related inventory over a
six-month period. The stores eventually will be converted to the
Walgreens brand.
Walgreens Chief Executive Stefano Pessina said the company
believes the new transaction "addresses competitive concerns
previously raised with respect to the prior transaction and will
streamline and simplify the transition for customers, team members
and other stakeholders."
The company said it expects $400 million in cost savings from
the new deal within three to four years of closing and said the
transaction will add to its adjusted earnings in the first
year.
Rite Aid Chairman and CEO John Standley said the deal gives the
company "clear solutions to assist us in addressing our pharmacy
margin challenges and allows us to significantly reduce debt,
resulting in a strong balance sheet and improved financial
flexibility moving forward."
Shares of Rite Aid fell 17% premarket, while shares of Walgreens
added 4.3%.
The five-member FTC is currently short-handed, with only two
sitting commissioners, one Republican and one Democrat.
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.
Walgreens-Rite Aid is the latest in a string of high-profile
deals to fall apart. Earlier this year, two pairs of health
insurers -- Aetna Inc. and Humana Inc. and Anthem Inc. and Cigna
Corp. -- said they would terminate their mergers, worth a combined
$82 billion, after courts found they violated antitrust law.
Last year, Pfizer Inc. abandoned its $150 billion takeover of
Allergan PLC after the Obama administration took aim at the deal,
which would have moved the U.S.'s biggest drug company to Ireland
and lowered its taxes. Halliburton Co. and Baker Hughes Inc. also
called off merger plans after they encountered regulatory
opposition on several continents. And a tie-up of Office Depot Inc.
and Staples Inc. was blocked in 2016 by a federal judge on the
grounds that it could lead to higher prices.
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 an 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.
In a statement, Fred's called the termination a "disappointing
outcome" but said it has no impact on the company's transformation
strategy. Shares of Fred's, which said the acquisition of 865 of
Rite Aid's stores would "accelerate our transformation, not define
it," recently dropped 19%; the stock had jumped sharply when the
deal to buy stores was announced.
Write to Anne Steele at Anne.Steele@wsj.com
(END) Dow Jones Newswires
June 29, 2017 09:18 ET (13:18 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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