September 21, 2017

Walgreens to purchase nearly 2,000 Rite Aid stores after receiving FTC approval

Daily Briefing

    Walgreens Boots Alliance on Tuesday said it has "secured regulatory clearance" for a scaled-back agreement to purchase nearly 2,000 Rite Aid stores, ending two years of negotiations over antitrust concerns.   

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    The boards of both companies have approved the move, the Wall Street Journal reports, and store transfers will officially begin in October, with the goal of completing the transition by spring of 2018.

    Background

    Walgreens in October 2015 initially announced an agreement to fully purchase Rite Aid for roughly $9.4 billion. The deal would have merged two of the country's three largest pharmacy owners. However, after FTC indicated it would not approve the merger, Walgreens and Rite Aid abandoned the proposal.

    In June of this year, the companies announced a new proposal under which Rite Aid would have sold 2,186 of its 4,600 stores, three distribution centers, and all related inventory to Walgreens for $5.18 billion in cash. Rite Aid also would have received a $325 million fee from Walgreens for terminating the companies' original merger agreement.

    However, after more talks with FTC, Walgreens and Rite Aid again amended the deal to drop roughly 250 stores from the agreement.

    Latest developments

    According to the Journal, FTC has closed its review of the agreement, granting the deal antitrust clearance over the objections of a Democratic commissioner.

    Under the latest deal, Walgreens will purchase 1,932 of Rite Aid's stores—most of which are located in the northeastern and southern parts of the country—for $4.38 billion. Walgreens also has paid a $325 million termination fee. Meanwhile, Rite Aid will continue operating about 2,600 stores; six distribution centers; EnvisionRx, its pharmacy benefit manager; RediClinic; and Health Dialog.

    Reaction

    The commissioner who objected to the agreement—Terrell McSweeny—said while the deal was better than the prior agreements, she disagreed with the decision to let it move forward because she believes the sale of some of the Rite Aid locations will eliminate the company's presence altogether in certain areas, effectively making CVS Health Walgreens' only competition.

    However, acting FTC Chair Maureen Ohlhausen, who supported the deal, said the stores being sold are in areas where Walgreens and Rite Aid aren't significant competitors, "and in some places, different types of retail pharmacy providers, such as mass merchants or supermarkets like Kroger and Wal-Mart, are significant competitors." According to Ohlhausen, Rite Aid "will remain a robust competitor in the areas where its presence matters in the formation of retail pharmacy networks, and it will retain most or all of its stores in those areas."

    Walmart, Walgreens, or CVS? Your guide to the right retail partnership

    Separately, Stefano Pessina, CEO and executive vice chair of Walgreens, said, "This is a significant moment for our company, and we are excited about the opportunities this agreement will deliver for our customers and patients, employees and investors," He added, "Combining Walgreens retail pharmacy network with a strong portfolio of Rite Aid locations is expected to help us achieve enhanced, sustainable growth while enabling us to broaden our reach and provide greater access to convenient, affordable care in more local neighborhoods across the United States."

    John Standley, CEO and chair of Rite Aid, added, "With a compelling and more profitable store footprint in key markets, enhanced purchasing capabilities and a stronger balance sheet and improved financial flexibility, we are well positioned to implement our plans to deliver improved results" (Japsen, Forbes, 9/19; Kendall and Hufford, Wall Street Journal, 9/19).

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    The field guide to hospital partnership and affiliation models

    Behind the flurry of M&A in recent years, a deeper trend of hospital integration is underway: the emergence of alternative partnerships that secure many of the same benefits of M&A without the financial and legal commitment: Clinical affiliation, regional collaborative, accountable care organization, and clinically integrated network.

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