Walgreens 'in dialogue' with FTC to finalize Rite Aid merger

Dive Brief:

Days after unnamed sources told Bloomberg that Federal Trade Commission officials are balking at Walgreens' proposed acquisition of rival Rite Aid, Walgreens Boots Alliance CEO Stefano Pessina assured shareholders that the drugstore giant is “actively engaged in dialogue with the FTC and we’ll do anything we can to support their work.”
Speaking Thursday at Walgreens' annual investors meeting in New York, Pessina said “In reality, the FTC is doing their job. It’s a process going on, and we cannot comment on the what the FTC is doing.” In addition to working with the FTC, “these days we’re discussing with Rite Aid all the instruments and all the actions that we can put in place to facilitate this process," Pessina noted. "This is what I can say today.”
Pessina had previously expressed confidence in the deal, and Walgreens raised its guidance based on the assumption of FTC approval. Walgreens and Rite-Aid previously set a Jan. 27 deadline to close the deal: In the event the merger doesn’t pass antitrust muster, Walgreens would be required to pay Rite Aid a termination fee of $325 million, which would double to $650 million "in certain circumstances," according to a previous filing.

Dive Insight:

Pessina didn’t elaborate what what “instruments and actions” Walgreens and Rite Aid may engage to further their deal. But there are reportedly some indications that the companies’ current divestiture plan may not fly with regulators, so it could be adding to the number of divested stores.

To assuage antitrust concerns, Walgreens and Rite Aid last month announced an agreement with Fred's Pharmacy, which will purchase 865 stores and certain assets related to store operations located across the eastern and western U.S. for $950 million in cash. That deal, contingent upon the Walgreens-Rite Aid tie-up's approval, would position Fred's Pharmacy as the third-largest drugstore chain in the United States, and surprised some analysts.

“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 earlier this month. “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.”

But a spokesperson from Fred's told Retail Dive that the company is in a good position and is 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."

Meanwhile, many more shareholders on Thursday pressed Walgreens on its cigarette sales than on its merger outlook. One noted a study released by competing drugstore chain CVS showing that its decision to halt tobacco sales has led to an overall decrease in smoking among Americans. They noted the incongruence of Walgreens’ position as a healthcare provider (especially one offering products and services to help people quit smoking), and one expressed concern about damaging the Walgreens brand with ongoing tobacco sales.

Executive chairman James Skinner said that he hadn’t yet looked at the CVS study and added that the company spends a lot of time “trying to convince people to stop smoking … but we also respect the choice of our consumers — that’s also part of our decision over time.”

But that policy may be changed in the future. “We have appreciated the choice that our consumers have to purchase tobacco and that’s were we have left it for now,” Skinner said. “It’s under review in every meeting that we have … it’s always up for review and a decision down the road.” Co-Chief Operating Officer Alex Gourlay added that Walgreens has reduced the visibility of cigarettes in certain markets and will measure those moves and “keep an eye on CVS.”