Walgreens, Rite Aid delay merger amid antitrust concerns

Dive Brief:

Walgreens Boots Alliance announced on Thursday an extension to its proposed $9.4 billion merger with Rite Aid, which was expected to be finalized by the end of the year. Pending approval from the Federal Trade Commission, the companies now expect the transaction to close in early calendar 2017.
Hesitation from Kroger Co. grocery chain regarding its potential purchase of 650 Rite Aid stores is putting the merger in doubt, according to multiple news outlets. The FTC threw a wrench into Kroger’s plans when regulators told the supermarket chain that it wouldn’t be allowed to close Rite Aid stores and integrate them into Kroger locations, sources told the New York Post.
Walgreens Boots Alliance also reported fourth quarter earnings on Thursday, showing same-store sales rose 3.2%. Q4 adjusted earnings were $1.07 per share on revenue of $28.6 billion, missing the Thomson Reuters I/B/E/S analyst expectation for $29.08 billion. The company reiterated its expectations that synergies from its acquisition of Rite Aid will top $1 billion, leading to guidance for its next fiscal year for earnings of $4.85 to $5.20 per share, in line with Thomson Reuters I/B/E/S expectations for $5.02 per share.

Dive Insight:

In the year or so since their merger plans were first announced, Walgreens Boots CEO Stefano Pessina and other Walgreens executives haven’t talked much about how many stores they might have to shed in order for the deal to pass muster with the FTC. In July, Walgreens pegged the number at 500, and at the time, observers said they believed that Pessina, well-known for his belief in expansion, may have been low-balling the number of closures that might be precipitated by any merger.

Walgreens Boots Alliance last month said admitted that the FTC was likely to require the divestment of as many as 1,000 stores in order to address antitrust concerns, and reiterated Thursday that it will likely have to close between 500 and 1,000 stores.

Indeed, many observers have expected the FTC to play hardball when it comes to antitrust concerns and retail mergers and acquisitions, considering regulators won an injunction against a merger between office supply retailers Staples and Office Depot earlier this year.

In order for a merger to pass with the FTC, the many Walgreens and Rite Aid stores that compete with each other now will have to find another rival willing to take on the locations in order to preserve competition in those areas. While many grocery chains run co-branded pharmacies and drugstore retail outlets at their locations, it’s not a natural fit, antitrust attorney David Balto told Reuters.

In a statement to Retail Dive, Conlumino CEO Neil Saunders said that overall, the next fiscal year "presents Walgreens Boots Alliance with more opportunities than it does challenges" for strong growth in sales and profits. But Thursday's results nevertheless contained disappointing news, starting with the delay in merger plans.

"There is no real mystery about this — it comes down to the glacial pace at which the Federal Trade Commission, which is examining the deal, moves," he said. "However, the extension means that Walgreens will not be able to rely on Rite Aid to boost its numbers in the next quarter. Longer term, we retain our view that the deal will be value accretive, mostly thanks to the forecast $1 billion in synergy savings and to the productivity improvements Walgreens can bring to Rite Aid’s rather lackluster stores."

The second concern, according to Saunders, is the drop in Walgreens's same-store sales and overall front-of-store sales. "Such an outcome is discouraging given that these had been on an upward trajectory thanks to the improvements the company has been making in its beauty offer," he wrote. "Given that Walgreens has also marketed its general merchandise offer more heavily this year, it is disappointing not to see gains in customer traffic. That said, the numbers are up against some tough comparatives from last year and with the new beauty offer continuing to attract interest from consumers, we believe that these metrics will strengthen over the holiday quarter."