Shares of Fred’s Pharmacy and Rite Aid Corp. fell Wednesday after a report surfaced that the U.S. Federal Trade Commission would sue to block the proposed merger between Rite Aid and rival drugstore company Walgreens Boots Alliance, Bloomberg reports. Fred's Inc., Walgreens and Rite Aid each declined to comment to Retail Dive.
The report cited a trade publication report in Capitol Forum that the FTC was considering filing suit to block the merger over antitrust concerns.
In December, the companies announced an agreement to sell 865 stores to Fred’s for $950 million in cash. Earlier this year, Walgreens and Rite Aid agreed to divest even more stores, boosting the number to 1,200, and to reduce their merger price.
Walgreens Boots CEO Stefano Pessina has been adamant about making this merger with Rite Aid happen, and the companies have been sweetening the pot for weeks to move along the process. Speaking to analysts in January, Pessina said the company had "no plan B” if the merger is scuttled, and later that month at Walgreens' shareholders meeting, he said the organization was “actively engaged in dialogue with the FTC” and declared “We’ll do anything we can to support their work.”
But that attitude may have run its course, with recent reports indicating that Walgreens is mulling a declaration of “certified compliance” — a shot across the bow to the FTC that essentially lets regulators know that the drugstore retailer considers the information and actions it’s taken to gain approval for the merger are sufficient and complete. Such an ultimatum gives regulators 30 days to decide one way or another, finally capping off a process that has dragged for close to 18 months. But it’s risky, because it could force the FTC to decide against the merger if it believes its antitrust concerns haven’t been addressed, something that now looks likely.
“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 late last year. “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.”
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 eventually went bankrupt, and sold some stores back to Albertsons in the process. Bloomberg notes that the FTC may be vulnerable to such warnings and is hoping to avoid that kind of situation.
But a spokesman from Fred's told Retail Dive earlier this year that the company is in a good position and is working closely with the FTC. "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," he said in an email. "Fred’s looks forward to realizing the considerable benefits this transaction will bring to customers, patients, payors, supplier partners, team members and shareholders."
Even before Wednesday's report, some observers weren't all that sanguine about the deal’s prospects, considering the antipathy the Obama-era FTC has shown against mega-mergers, including deals involving retailers. Last May, for example, regulators scuttled a proposed $6.3 billion tie-up between rivals Office Depot and Staples, despite Amazon’s entry into the office supplies retail and business contracts spaces. The FTC has just two members post-election, one Democrat and one Republican, so chances for a unanimous decision are seen as murky.