Did Walgreens and Rite Aid just work out a better deal for their businesses?
Talk about a long, strange trip. Walgreens Boots Alliance’s planned $9.4 billion acquisition of Rite Aid, which began with talks between the two drugstore chains in 2015, was called off yesterday. In the end, the parties concluded the Federal Trade Commission (FTC) was not going to approve the purchase and opted to work out a smaller deal for Walgreens to acquire 2,186 Rite Aid stores and three of its distribution centers for $5.175 billion.
Stefano Pessina, Walgreens chief executive officer, said the new, smaller deal will help to achieve its goal of expanding the company’s reach in the Northeast, Mid-Atlantic and Southeast, while providing fewer challenges to face financially and operationally.
Speaking on an earnings call with analysts yesterday, Mr. Stefano said the new deal would allow Walgreens to achieve more than $400 million in annual synergistic savings three to four years after closing. He said the stores Walgreens is acquiring present an opportunity to achieve even greater efficiencies on top of that.
“We feel good about that core of stores we’re acquiring,” said Alexander Gourley, Walgreens’ co-chief operating officer, on the call. “We think they are good value for us and it will really, really improve our network.”
The newest deal will also acquire FTC approval and it’s not clear whether or not Walgreens will face similar antitrust concerns given the concentration of stores it will hold in the regions where it is acquiring Rite Aid locations.
Rite Aid CEO John Standley expressed satisfaction with the new deal. He said it “provides a clear path forward and positions Rite Aid as a strong, independent, multi-regional drugstore chain and pharmacy benefits manager with a compelling footprint in key markets.
“The transaction offers clear solutions to assist us in addressing our pharmacy margin challenges and allows us to significantly reduce debt, resulting in a strong balance sheet and improved financial flexibility moving forward,” he added.
Yesterday, Walgreens reported a sales gain of 2.1 percent for its third quarter, while earnings per share increased 12.7 percent.
- Walgreens Boots Alliance Enters into Agreement with Rite Aid to Buy 2,186 Rite Aid Stores and Related Assets – Walgreens Boots Alliance, Inc.
- Rite Aid Enters Into an Agreement with Walgreens Boots Alliance to Sell 2,186 Rite Aid Stores and Related Assets for $5.175 Billion – Rite Aid Corporation
- Walgreens Boots Alliance’s CEO Stefano Pessina on Q3 2017 Results (Earnings Call Transcript) – Seeking Alpha
- Walgreens Boots Alliance Reports Fiscal 2017 Third Quarter Results – Walgreens Boots Alliance, Inc.
DISCUSSION QUESTIONS: What will the new deal between Walgreens and Rite Aid mean for their respective businesses? What will it mean for CVS and other retailers with pharmacies that compete with the two chains?