Contrary to previous reports that the Walgreens-Rite Aid merger is on a smooth path to approval by the Federal Trade Commission, sources tell Bloomberg that antitrust officials are wary that the drugstore retailers’ plan to offload stores to ease competition concerns doesn’t go far enough.
To assuage antitrust regulators, Walgreens and Rite Aid last month announced a $950 million cash agreement with Fred's Pharmacy, which will purchase 865 stores and certain assets related to store operations located across the eastern and western U.S. — a deal contingent upon the Walgreens-Rite Aid tie-up's approval. But sources close to the matter suggest that Walgreens Boots Alliance may have to divest itself of as many as 1,000 stores to gain the blessing of antitrust officials.
Spokespeople from Walgreens and Rite Aid each declined to comment to Retail Dive on the report. But a spokesperson from Fred's said 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."
At this point, the FTC is likely to miss the retailers' Jan. 27 deadline to close the deal: In the event the merger doesn’t pass antitrust muster, 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 FTC officials are wary of the agreement with Fred’s, considering reports at the end of last year that the retailer is having some difficulty obtaining financing. “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 in December. “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 is likely to require Fred’s to raise additional equity to stabilize its financing, a source told the New York Post earlier this month. That same report noted that rival drugstore chain CVS 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.
Walgreens CEO Stefano Pessina in October said the company had no plan B in case the merger fails to win approval and expressed confidence that it would; in fact, the retailer raised its guidance for the year in light of that expectation. Shares of Walgreens, Rite Aid and Fred’s all fell Friday after Bloomberg’s report undermined investor confidence.