Walgreens and Rite Aid went back to the drawing board again and on Tuesday announced a deal for Walgreens to buy 1,932 Rite Aid stores, three distribution centers and related inventory for $4.375 billion in cash that has cleared Federal Trade Commission approval, the companies said in press releases emailed to Retail Dive. Store purchases are expected to begin in October with completion anticipated in spring 2018, Walgreens said in its release.
The amended and restated purchase agreement between the two drugstore retailers updates the terms of the agreement Walgreens had with Rite Aid that was announced in June, Walgreens said. Under the new agreement, Rite Aid will retain some 250 more stores than it would have under the June version, the result of discussions between Rite Aid, Walgreens and FTC regulators, Rite Aid said.
The June agreement had entailed scrapping the original merger plans in favor of a scaled-down purchase by Walgreens of 2,186 Rite Aid stores, the distribution centers and related inventory for $5.175 billion in cash. Walgreens is also paying a merger termination fee to Rite Aid of $325 million in cash.
It's been a long time coming, but Walgreens will finally expand its footprint. After all the Rite Aid stores are acquired by Walgreens, they will be converted to the Walgreens brand in phases, Walgreens said. Those stores are located primarily in the Northeast and Southern U.S., and the three distribution centers are in Dayville, CT, Philadelphia, PA. and Spartanburg, SC. The shift of the distribution centers to Walgreens won't begin for at least 12 months.
This agreement, as with the one in June, includes an option for Rite Aid to become a member of Walgreens Boots Alliance’s group purchasing organization. Walgreens Boots Alliance will also assume certain limited store-related liabilities as part of the new transaction, which has been approved by the boards of directors of Rite Aid and Walgreens Boots Alliance and remains subject to other customary closing conditions. The deal doesn’t require shareholder approval, according to Rite Aid’s announcement.
Due to the expected timing of store purchases under the amended agreement, Walgreens Boots Alliance doesn’t expect the transaction to have a significant impact on its adjusted diluted net earnings per share in the fiscal year ending Aug. 31, 2018. The company expects to see annual synergies from the new transaction of more than $300 million, which are expected to be fully realized within four years of the initial closing of the new transaction and derived primarily from procurement, cost savings and other operational matters, the company said.
In his statement emailed to Retail Dive on Tuesday, Walgreens Boots Alliance Executive Vice Chairman and CEO Stefano Pessina called the deal "a significant moment for our company" that he said would help the drugstore retailer "achieve enhanced, sustainable growth while enabling us to broaden our reach and provide greater access to convenient, affordable care in more local neighborhoods across the United States."
"[W]e are excited about the opportunities this agreement will deliver for our customers and patients, employees and investors," he said. "We are confident in the path ahead and look forward to working together to shape the future of health care and deliver on the full potential these stores bring to our network."
Rite Aid Chairman and CEO John Standley, said in his statement said that garnering FTC approval for this agreement provides "a clear path forward to realize the benefits of this transaction."
"With a compelling and more profitable store footprint in key markets, enhanced purchasing capabilities and a stronger balance sheet and improved financial flexibility, we are well positioned to implement our plans to deliver improved results," he said.
Notably absent in the deal is Fred’s Pharmacy, which had been slated to buy up 865 Rite Aid stores for $950 million— contingent upon the original merger going through. That had made the drastically scaled down takeover plan announced in June actually more worrisome to some antitrust regulators than the previous, more ambitious plan, according to a report from The Capitol Forum. Retail Dive’s request to Fred’s for comment weren’t immediately returned.
Walgreens Boots CEO Stefano Pessina has been adamant about making some kind of merger happen, and the companies had worked to sweeten the pot for months to move along the process. Speaking to analysts in January, Pessina said the company had "no plan B" if the merger is scuttled. 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 in June, the company more or less threw in the towel, agreeing instead to buy far fewer Rite Aid stores than Pessina had first envisioned. The acquisition had faced intense scrutiny by antitrust officials, and by summer it was clear that one solution — a spinoff of Rite Aid stores to Fred’s — wouldn't pass muster. In fact, that deal with Fred’s came as a surprise to some analysts because it wasn’t clear how the smaller pharmacy chain would raise the funds. Rival CVS Health, which was set to be dethroned as the nation’s largest drugstore retailer if the merger proceeded, had reportedly warned the FTC that the Safeway deal actually served as a cautionary tale. Without the viability of that deal, there wasn't likely enough competition in the drugstore space to ease the FTC's concerns.
Some observers were never all that sanguine about the original deal’s prospects, with or without Fred's, considering the skepticism the FTC (at least in the Obama era) has shown against some mega-mergers. Last May, for example, regulators scuttled a proposed $6.3 billion partnership between rivals Office Depot and Staples, despite Amazon’s entry into office supply retail and business contracts.