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Jury still out on WBA-Rite Aid merger deal

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WASHINGTON — The acquisition of Rite Aid Corp. by Walgreens Boots Alliance (WBA) Inc. remained unconsummated after WBA’s plan to divest 865 stores failed to erase antitrust regulators’ competitive concerns.

When the Friday, January 27, deadline for completing the Walgreens-Rite Aid merger deal arrived, the Federal Trade Commission still hadn’t cleared the transaction, despite the $950 million deal to sell the stores to Fred’s Inc.

WBA and Rite Aid announced an extension of their merger deal end date the following Monday, along with an amended acquisition agreement that pared WBA’s offer price for Rite Aid.

The deal end date was moved to July 31 to provide extra time to gain FTC approval, the companies said. WBA reduced its price to buy Rite Aid to a minimum of $6.50 per share and a maximum of $7.00 per share, which would lower the cash portion of the transaction to about $6.84 billion to $7.37 billion, plus the assumption of Rite Aid’s debt. The original acquisition offer on Oct. 27, 2015, was for $9 per share and the assumption of over $7 billion in net debt, for a total deal value of $17.2 billion.

WBA also upped the number of stores that could be divested for antitrust clearance of the merger. The company said it will be required to divest up to 1,200 Rite Aid stores and certain other assets if necessary for regulatory approval. That would be 200 more stores than the up to 1,000 that WBA said it was willing to divest originally. WBA had initially said it expected to have to divest less than 500 stores but then in early September raised that figure to between 500 and 1,000.

The store divestiture total will affect the ultimate share price for the deal. The price will be set at $7.00 per share if 1,000 stores or fewer are divested and at $6.50 per share if 1,200 stores are required for divestiture. If the required divestitures fall between 1,000 and 1,200 stores, the price per share will be adjusted pro rata.

Besides FTC approval, the amended agreement is subject to approval by Rite Aid shareholders as well as other customary closing conditions.

The WBA-Rite Aid transaction would merge the No. 2 and No. 3 pharmacy chains in the U.S., vaulting the combined company past CVS Health to become the leading drug chain by number of stores. WBA and Rite Aid in October had pushed back the end date for the deal by three months, saying they expected the transaction to close early in 2017.

Stefano Pessina_WBA_headshot

Stefano Pessina

“The FTC is doing its job,” WBA executive vice chairman and chief executive officer Stefano Pessina said at the company’s annual shareholders meeting in New York late last month. “The process is ongoing. We’re actively engaged with the FTC and doing everything we can to support its work.”

“We’re actively engaged in discussions with Rite Aid,” he added, and about to put in place “instruments and actions to facilitate the approval process.”

Pessina told Bloomberg that extending the deadline again was a matter for the boards of the two companies. “I cannot anticipate what they will do,” he said.

He said in October that WBA had never seen an “absolutely negative” attitude from the FTC. “At the end of the day, I believe we are having a good collaboration. We try to respond to the all of their needs. This takes time. But at the end, we are still ­confident.”

When WBA announced the agreement to acquire Rite Aid in October 2015, it projected that the deal would get done within 12 months. If the transaction doesn’t win government approval, Walgreens would have to pay Rite Aid a termination fee of $325 million or $650 million “in certain circumstances,” according to a company filing.

An FTC that views the deal more favorably may emerge under the Trump administration. President Trump in his first week in office named commissioner Maureen Ohlhausen, a Republican, as the five-member FTC’s acting chairman. She will succeed Edith Ramirez, a Democrat, who is stepping down as chairman in a matter of days.

With Ohlhausen as chairman and Democrat Terrell Mc­Sweeny as a commissioner, the FTC will have three vacancies. Trump’s adviser for the new makeup is former commissioner Joshua Wright, a conservative law professor who says mergers and acquisitions rarely hurt consumers and can often help them by lowering prices and improving quality.

Under the Obama administration, the FTC scrutinized deals in the health care sector, targeting hospital mergers and acquisitions of generic drug makers.

The commission carefully assesses purchasers of assets to deem whether they can restore competition. CVS Health chief financial officer David Denton said at a conference last month that Fred’s would not be a viable competitor over time.

Fred’s, a Memphis-based discount store and pharmacy retailer, closed out its 2016 fiscal year on a down note. Fourth-quarter revenue fell 4.3%, and comparable-store sales declined 3.6%. Full-year sales came in at $2.126 billion, down 1.1%, while comp-store sales decreased 2.2%. January 2017 sales totaled $148.1 million, down 5.6%, and same-store sales for the month fell 4.8%.

Hours after WBA and Rite Aid unveiled their amended deal, Fred’s announced that its agreement “remains in effect.”

“The amendment and extension of the Walgreens-Rite Aid merger agreement reinforces the company’s confidence that the transaction is in the mutual best interest of Fred’s Pharmacy and all of its shareholders,” Fred’s said in a statement. “Fred’s Pharmacy continues to work with the FTC, Rite Aid and Walgreens to complete the transaction and looks forward to realizing the considerable benefits the transaction will bring to customers, patients, payors, supplier partners, team members and shareholders.”

Under its agreement to buy the 865 Rite Aid stores, Fred’s could be required to purchase additional stores if the FTC requires WBA to divest more stores than was contemplated when the deal was struck in December.


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