Walgreens Wins U.S. Approval for Rite Aid Deal on Fourth Try

Updated on
  • Rite Aid shares plunge after new agreement cuts total price
  • Deal now includes 1,932 stores, for $4.38 billion total

Walgreens CEO on U.S. Regulatory Environment

Walgreens Boots Alliance Inc. clinched regulatory approval for a deal to buy Rite Aid Corp. stores after a last-minute reduction of the number of stores and price, a hard-fought victory following two years of failed attempts.

The drugstore chain gained clearance from the U.S. Federal Trade Commission on its fourth try, but still drew criticism from one of the two commissioners currently on the short-staffed agency, who raised concerns that the deal will reduce competition and lead to rising prices for generic drugs.

Under the new agreement, announced Tuesday, Walgreens will buy 1,932 Rite Aid stores for $4.38 billion, becoming a bigger competitor to CVS Health Corp. That’s about 250 fewer stores than under a previous proposal, which totaled $5.18 billion.

Walgreens Chief Executive Officer Stefano Pessina, who had pushed for a transaction since the fall of 2015, said he was surprised by the roadblocks he faced over the lengthy negotiations with regulators.

“We have been a little surprised by the difficulties that we have found and by the length of the process” in getting the deal approved, Pessina said in an interview on Bloomberg Television. “We had to change completely the structure of the deal” when it became clear the FTC was not going to accept an outright acquisition of Rite Aid, the CEO said.

The modified agreement, while reduced, will still enable Walgreens to edge past CVS to become the largest U.S. pharmacy chain by number of stores.

Rite Aid shares closed down 12 percent to $2.40, the most since June 29, when Walgreens abandoned an earlier plan to buy Rite Aid outright. Walgreens fell 1.7 percent to $81.21.

The deal is proceeding despite a disagreement between FTC Acting Chairman Maureen Ohlhausen and Commissioner Terrell McSweeny about whether to open an in-depth investigation into the transaction as a 30-day review deadline was set to expire. Under antitrust law, a deal can go forward without a vote by the commissioners if the FTC declines to extend the review period by issuing a so-called second request for information from the companies, which begins an in-depth investigation.

McSweeny, a Democrat, disagreed with the decision to clear the deal without a second request. The acquisition eliminates Rite Aid’s footprint across much of the country, which may force it to pay more for generic pharmaceuticals and raise prices for drugs, she said in a statement.

“I am concerned that the transaction will leave some communities with fewer pharmacy options and could lead to higher drug prices,” McSweeny said.

Ohlhausen, a Republican, said in a separate statement the agency over the past 22 months had thoroughly reviewed the competitive issues. Ohlhausen and McSweeny are the sole sitting FTC commissioners as three vacant seats await appointees under the Trump Administration.

“Rite Aid will remain a robust competitor in the areas where its presence matters,” Ohlhausen said. “Rite Aid is likely to achieve comparable or even lower costs for generic drugs for the foreseeable future.”

New York State

The store purchases are expected to begin in October and be completed in the spring of 2018, Walgreens said. Most of them are in the northeast and southern U.S., the company said.

With the addition of the Rite Aid stores, Walgreens will have about 10,000 locations in the U.S., compared with 9,700 for CVS. Rite Aid said it will retain about 2,600 stores when the deal is complete.

In the final version of the deal, Walgreens slashed the number of stores it will buy in New York state to 272 from 456 to address competitive concerns, New York Attorney General Eric Schneiderman said in a statement. The company will purchase 34 fewer stores in New Jersey and 13 fewer stores in Connecticut, allowing Rite Aid to retain significant share in the New York City metro area, he said. A Walgreens spokesman declined to comment on the locations of the store purchases.

Walgreens initially proposed a takeover of Rite Aid in October 2015 for $9 a share, or $9.4 billion. That deal ran into roadblocks at the FTC, and in January Walgreens and Rite Aid recut the deal in an attempt to resolve the agency’s concerns that the combination would hurt competition.

A revamped merger plan called for selling up to 1,200 Rite Aid locations to another buyer to satisfy the FTC and was worth at least $2 billion less to Rite Aid shareholders. That approach, which could have cost Walgreens as much as $7.37 billion, again failed to win over the regulator, and Walgreens terminated the plan in June.

The company said it instead would pay $5.18 billion to acquire 2,186 stores, leaving a slimmed-down Rite Aid as a stand-alone company. But that still wasn’t enough to satisfy the FTC. The final version of the deal that was announced Tuesday has about 12 percent fewer stores -- and a lower price.

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