Fred's Pharmacy to acquire 865 Rite Aid stores for $950M

Dive Brief:

Fred's Pharmacy on Tuesday announced it has signed an agreement with Walgreens Boots Alliance, Inc. and Rite Aid Corporation to purchase 865 stores and certain assets related to store operations located across the eastern and western United States for $950 million in cash, according to a press release.
The transaction is expected to close after the completion of Walgreens Boots Alliance's proposed $9.4 billion acquisition of Rite Aid and is subject to the approval of the Federal Trade Commission, as well as customary regulatory approvals and closing conditions. Shareholder approval is not required.
The deal, which the companies aim to close during the first half of 2017, is likely to ease approval of Walgreens' acquisition of Rite Aid, which was delayed in October over antitrust concerns. The 865 stores Fred's plans to take on is between the 500 to 1,000 stores Walgreens and Rite Aid said they expected to shed.

Dive Insight:

On Monday this rumored deal seemed precarious, amid a report from mergers and acquisitions news site CTFN that Fred’s was having difficulty obtaining financing. But on Tuesday, Fred’s said that it has received financing commitments to fund the purchase price, transaction-related costs, ongoing business operations and anticipated capital investments. Fred's stock surged 26% in pre-market trading after news of the deal broke, MarketWatch reports.

The deal will position Fred's Pharmacy as the third-largest drugstore chain in the United States. “This is good,” Betty Chan, a senior analyst at Elevation Securities, told Retail Dive. “We’re a little surprised that Fred’s is able to buy 865 stores, but if approved it would be very significant to create a third national competitor. Fred being a new national competitor now is something that the FTC would like to see — it’s just a question of whether or not they can hammer out the final details now.”

Chan said the announcement may have been prompted by a slip of the tongue on its earnings call last week, in which Fred’s executives hinted at a “pending transaction," sparking speculation as to what deals were on the table. “This is a big deal for Fred, so there may be some questions about their financing,” she said. “But we would not expect financing to be a condition here.”

Last week, during its third quarter earnings call with analysts, Fred's executives emphasized a goal to expand across the country beyond its stronghold in the South as a major element of a growth strategy. “We have already learned through our acquisition of Entrust and Reeves-Sain that expanding our reach and our portfolio of goods and services is a main driver of growth,” Bloom said Thursday. “We are actively focused on finding the right opportunities that will leverage the experience of this leadership team and our core competencies in retail pharmacy and specialty pharmacy.”

Fred's has felt the pressure of competition from Wal-Mart and dollar stores, and is in the midst of a turnaround. An effort to expand pharmacy operations, including healthcare services, emerged under former CEO Jerry Shore (who stepped down in August) and has been continued by Bloom (the former Family Dollar CEO and CVS executive).

The company has already begun the process of integration in anticipation of a deal, Bloom said in a statement Tuesday. "We have been working for several months on integration plans to ensure a seamless transition for Rite Aid customers, patients, team members and supplier partners by leveraging our world-class senior leadership team's significant expertise in managing major healthcare acquisitions and integrations,” Bloom said. “We assembled this highly experienced team in 2015, implemented upgrades to our infrastructure in 2016, and now, in 2017, we look forward to the continued optimization of our business, fueled by today's milestone announcement.”

A.T. Kearney served as a strategic advisor and provided financial and operational diligence related to the transaction, and BofA Merrill Lynch and Regions Bank have committed to provide financing, according to a press release.