Dive Brief:

• Federal Trade Commission staff are preparing to recommend that the agency sue to block Walgreens’ attempted takeover of rival Rite Aid, according to a report from investigative news and legal analysis company Capitol Forum. 

• Staff analyzing the case have not been convinced of the viability of the proposal that Fred’s Pharmacy acquire divested stores, sources told the Capitol Forum.

• In December, Fred’s announced that this year it would buy up 865 Rite Aid stores for $950 million (contingent upon the merger going through) and in March, as Walgreens and Rite Aid attempted to smooth their deal, that was expanded to include more stores as well as distribution centers, software and human resources. 

Dive Insight:

The deal with Fred’s came as a surprise to some analysts from the get-go because it wasn’t clear how the smaller pharmacy chain would get the money. Without the viability of that deal, there may not be enough competition in the drugstore space to ease the FTC's antitrust concerns.

“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,” Betty Chan, a senior analyst at Elevation Securities, told Retail Dive late last year. “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.” 

A spokesperson from Fred's has told Retail Dive that the company is indeed in a good position and has been working closely with the FTC. "Fred’s is working constructively with regulators to complete the proposed transaction to acquire 865 Rite Aid stores," he said in an email. "Fred's is an extremely well-positioned buyer that is ready, willing and able, with the proposed divestiture assets, to maintain and enhance competition in the retail pharmacy market. Fred’s looks forward to realizing the considerable benefits this transaction will bring to customers, patients, payors, supplier partners, team members and shareholders."

But the FTC may be wary of Fred's move, and rival drugstore chain CVS reportedly has pointed out to the FTC what it says are similar deals gone bad. CVS executives say that the sale to Fred’s isn’t sufficient to ensure competition. They compare the situation to Safeway’s sale of 146 stores to Haggen Holdings in 2015 in order to win antitrust clearance for its merger with Albertsons. Haggen eventually went bankrupt and sold some stores back to Albertsons in the process. 

Some observers have never been all that sanguine about the deal’s prospects, considering the skepticism the FTC (at least in the Obama era) has shown against some mega-mergers, including deals involving retailers. Last May, for example, regulators scuttled a proposed $6.3 billion tie-up between rivals Office Depot and Staples, despite Amazon’s entry into the office supplies retail and business contracts spaces.

But Walgreens Boots CEO Stefano Pessina has been adamant about making this merger happen, and the companies have been sweetening the pot for weeks to move along the process. Speaking to analysts in January, Pessina said the company had "no plan B” if the merger is scuttled. Later that month, at Walgreens' shareholders meeting, he said the organization was “actively engaged in dialogue with the FTC” and declared, “We’ll do anything we can to support their work.”