Walgreens may close up to 1,000 stores to seal Rite Aid deal

Dive Brief:

Walgreens Boots Alliance may have to divest itself of up to 1,000 stores in order to win approval from the Federal Trade Commission for its proposed acquisition of drugstore rival Rite Aid, the company said Thursday.
Walgreens had previously said it expected to shutter just 500 stores to assuage the FTC’s antirust concerns.
The company “continues to believe that the acquisition will close in the second half of calendar 2016,” according to the press release.

Dive Insight:

The Federal Trade Commission these days is widely seen as having little appetite for mergers that could overly consolidate a sector. Regulators won an injunction against a merger between office supply retailers Staples and Office Depot earlier this year, for example, despite some evidence that competition from Amazon could soon disrupt the space.

In the past, executive vice chairman and CEO Stefano Pessina and other Walgreens Boots executives have declined to talk about how many stores they might have to shed in order for its proposed purchase of Rite Aid to pass muster with the FTC. In July, Walgreens put the number at 500, and at the time, observers said they believed that Pessina, known for his belief in expansion, may have been low-balling the number of closures that might be precipitated by any merger.

When the $9.4 billion deal was first announced last year, Rite Aid did say it might close as many as 1,000 of the 12,8000 stores the combined company would run. And in a November 2015 blog post, real estate services company Cushman & Wakefield's VP of retail research, Garrick Brown, noted that there are some 3,000 locations where there are Walgreens and Rite Aid stores near each other, and calculated those could eventually all close.

"It is not unreasonable to assume that there may be as many as 3,000 existing Walgreens and Rite Aid stores today that will eventually be closed or sold off over the next few years as a result of this deal," he wrote. "This could play out with as many as 1,000 units before the deal closes and I estimate up to 2,000 more stores after the deal closes."

The potential increase in the divestiture size remains in line with expectations, but things could get dicey if the number goes beyond 1,000 stores, according to Moody’s Investors Service.

"WBA’s increase on the amount of potential store divestitures that may be required by the FTC for approval to acquire Rite Aid is in line with our original expectations,” Maggie Taylor, Moody’s Investors Service senior vice president, said in a statement emailed to Retail Dive. “However, should the level of divestitures materially increase above 1,000 stores we would reconsider our earnings expectations for WBA going forward and the potential outcome of our ongoing review for downgrade.”

Both Walgreens and Rite Aid hope the deal will ultimately boost the combined company’s earnings per share in the first full year after closing of the transaction. In a statement, the companies said they expect to “realize synergies from the acquisition in excess of $1 billion, to be fully realized within three to four years of closing,” thanks to procurement, cost savings and other operational efficiencies.