Scrutiny by antitrust regulators apparently spooked Walgreens Boots Alliance Inc. (NASDAQ:WBAC) and Rite Aid Corp. (NYSE:RADA) out of their planned $9.4 billion merger. Instead, Walgreens has agreed to buy half of Rite Aid’s stores.
The new deal will cost Walgreens $5.18 billion in cash. Investors in both companies were generally not surprised, especially after learning that Rite Aid had received feedback from the Federal Trade Commission indicating the merger would not have been approved.
The Problem With The Deal
One obvious major issue that worried regulators was the fact that the resulting giant drugstore chain – an obvious challenge to CVS Health Corp. (NYSE:CVSC) - would have had the ability to strong-arm pharmacy-benefit managers in charge of corporate and government drug plans.
According to Walgreens Chief Executive Stefano Pessina, the new scaled-back transaction “addresses competitive concerns previously raised with respect to the prior transaction and will streamline and simplify the transition for customers, team members and other stakeholders.”
Impact Of The New Deal
Walgreen’s offer to buy half of Rite Aid’s existing stores terminates Rite Aid’s agreement to sell some stores to Fred’s Inc. (NASDAQ:FREDA) for which Walgreens will pay Rite Aid a $325 million termination fee.
Eventually the 48% of Rite Aid’s 4,523 stores acquired by Walgreens will be converted to the Walgreens brand. The acquisition will take place over a 6-month period and in addition to the stores will include 3 distribution centers and related inventory.
Rite Aid Repositioning
The benefit to Walgreens is obvious. For Rite Aid the deal provides an opportunity to reposition itself and its remaining structure as an independent multiregional drugstore chain and pharmacy benefits manager. The company will also have the option to buy generic drugs from an affiliate of Walgreens.
Rite Aid will also use the proceeds from the deal to "significantly" reduce debt and strengthen its balance sheet, according to a company press release.
A Sign Of Regulatory Concern
The decision to scuttle the Walgreens’ acquisition of Rite Aid demonstrates how concerned the FTC remains about mergers of major players in certain sectors. This despite a general sense that the Trump administration would lighten up on business regulations.
Experts cited several recent challenges from the FTC including the proposed merger of DraftKings and FanDuel, the blocking of a $37 billion merger between health insurance titans, Aetna Inc. (NYSE:AETC) and Humana Inc. (NYSE:HUMC) and another involving a $48 billion merger of Anthem Inc. (NYSE:ANTMC) and Cigna Corp. (NYSE:CLC).