Walgreens execs say they'll find another buyer if Fred's deal falls through

Dive Brief:

  • Executives at Fred’s Pharmacy and Walgreens Boots Alliance this week expressed confidence that the Federal Trade Commission will ultimately bless the proposed merger between Walgreens and rival drugstore retailer Rite Aid — a deal contingent on Fred's acquiring hundreds of Rite Aid locations.

  • “Fred’s Pharmacy remains committed to purchasing additional assets, including up to 1,200 Rite Aid stores, to the extent necessary to obtain the FTC’s approval of the transaction,” Fred’s CEO Mike Bloom told analysts on Thursday, according to a transcript from Seeking Alpha. “We expect that acquiring the Rite Aid stores in these highly attractive markets will further accelerate our healthcare growth strategy and result in a company with enhanced scale and size that combined will be more competitive and create tremendous opportunities for our customers and team members.”

  • Bloom's comments follow a day after Walgreens Boots Alliance CEO Stefano Pessina told analysts that his company believes that Fred’s is the “right buyer,” but would look to find others if the FTC objects to the scheme. “[Fred's is] absolutely a legitimate player in this industry. If for some reason this will not be the case, then we will review our options of course and we will take a decision,” Pessina said, according to a transcript from Seeking Alpha.

Dive Insight:

Questions from analysts on Wednesday reflected a certain amount of skepticism that Fred’s could pull off the purchase of so many Rite Aid stores. A deal with Fred’s was first announced in December, with a plan for the regional drugstore retailer to take on 865 stores and certain assets related to store operations located across the eastern and western United States for $950 million in cash. That number has now ballooned to as many as 1,200, as Walgreens and Rite Aid in turn are facing skepticism from the FTC about how the deal could preserve competition.

“This is good,” Betty Chan, a senior analyst at Elevation Securities, told Retail Dive when the deal was first announced in December. “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. 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.” 

It’s not clear that those details have been hammered out. To help salvage their deal, Walgreens and Rite Aid have made significant changes, including an increase in the number of divested stores, a reduction in price 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, and a delay in the merger end date from January to July 31.

Fred’s has already spent the past 18 months on a turnaround, shuttering 40 underperforming stores (with plans to close another 40 this quarter), remodeling 55 others, boosting store staff pay and benefits, and investing in technology. But there’s nothing to compare to the investment in the Walgreens-Rite Aid stores, Bloom said.

Fred’s on Thursday reported a Q4 net loss of approximately $22.5 million, or $0.6 per share, and posted charges totaling $23.4 million, or $0.49 per share. The charges include $10.2 million for professional and legal advisory fees incurred in connection with the Rite Aid deal as well as "the development and implementation of the company’s growth strategy.”

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