Walgreens, Rite Aid cut merger price, will divest more stores

Dive Brief:

Walgreens Boots Alliance and Rite Aid have agreed to reduce the price for each share of Rite Aid common stock to be paid by Walgreens to a maximum of $7.00 per share and a minimum of $6.50 per share, or $7.37 billion to $6.84 billion, down from the $9 per share or $9.4 billion under their previous merger plan announced in 2015.
In addition, Walgreens Boots Alliance will be required to divest up to 1,200 Rite Aid stores and certain additional related assets to obtain regulatory approval. The drugstore rivals said they also agreed to extend their merger process end date to July 31 to allow additional time to obtain regulatory approval; their previous deadline was this past Friday.
Meanwhile, private equity firm Cerberus Capital may be in the running to take on some of the drugstores that Walgreens and Rite Aid must divest in order to assuage antitrust concerns from the Federal Trade Commission over their now-$7.4 billion merger, the New York Post reports.

Dive Insight:

Walgreens Boots Alliance CEO Stefano Pessina assured shareholders on Thursday that the drugstore giant is “actively engaged in dialogue with the FTC and we’ll do anything we can to support their work.”

Pessina told investors "the FTC is doing their job. It’s a process going on, and we cannot comment on the what the FTC is doing,” adding “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. This is what I can say today.”

Monday's announcement gives a better clue to what Pessina was talking about. Both Walgreens and Rite Aid have been free to end their merger agreement once the deadline passed, but their announcement Monday shows that the retailers are holding firm.

Indeed, Pessina had previously expressed confidence in the deal, and Walgreens raised its guidance based on the assumption of FTC approval. In the event the merger falls through, 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.

It's not clear whether Monday's announcement also bolsters Cerberus's position to take on divested stores, the number of which has increased compared to the 850 to 1,000 stores the retailers previously speculated would be spun off. The PE firm earlier bid on the stores in December, but lost out to the Fred’s pharmacy chain, which won an auction with a $950 million bid. Cerberus’ bid was higher, but Walgreens was concerned that FTC officials wouldn’t approve a deal with private equity, according to the Post.

To assuage antitrust concerns, Walgreens and Rite Aid last month announced that Fred's Pharmacy will purchase 865 stores and certain assets related to store operations located across the eastern and western U.S. 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.”

The FTC's concerns about Fred’s ability to handle the acquisition came to light earlier this month. Rival drugstore chain CVS reportedly has warned the FTC that the sale to Fred’s isn’t sufficient to ensure competition, comparing 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 went bankrupt last year, and sold some stores back to Albertsons in the process.

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."

Walgreens declined to comment on the Post's story. Requests for comment to Rite Aid, Fred’s and Cerberus from Retail Dive were not immediately returned.