Walgreens' bid isn't a hard pill to swallow.

Photographer: Michael Nagle

Rite Aid, Right Time

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.
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Add one more entry to the list of health-care deals. 

Walgreens Boots Alliance (we're still getting used to its new name, too) agreed to acquire its smaller competitor Rite Aid in a $17.2 billion all-cash deal that was announced late Tuesday.

It's one of those transactions that was a matter of when, not if. And now does seem to be the perfect "when" -- the deal came together exactly one month after Rite Aid erased its gains for the entire year and became $1 billion cheaper. 

Drug developers, the hospitals that write the prescriptions, the insurers that pay for them, the companies that act as the negotiating go-between and now pharmacies  --  operators in almost every facet of the medical field are looking for deal partners in what's been a record year for health-care M&A. They're all trying to one-up each other for pricing power as they jockey to capture new customers entering the system as a result of the Patient Protection and Affordable Care Act.

No wonder Rite Aid is willing to sell now. The industry's average takeover premium is also higher now than it's been in each of the previous three years. 

The timing also coincides with Rite Aid's expansion into pharmacy-benefit management. It purchased EnvisionRx from private-equity firm TPG for about $2 billion earlier this year, giving it a new inroad to compete against CVS Health, which runs drugstores and a leading PBM business, Caremark. (EnvisionRX is much smaller.) 

Walgreens Chief Executive Stefano Pessina signaled the possibility of a Rite Aid-type purchase on an earnings call back in July, saying his $104 billion company is interested in joining the "horizontal and vertical consolidation" that's been taking place in health care. That spurred speculation that Walgreens would buy either a smaller pharmacy chain or a big PBM such as Express Scripts. Instead, it gets a little of both through Rite Aid. (Express Scripts shares fell on news of the deal.)

Rite Aid's stock had previously lost 19 percent this year as both Walgreens and CVS climbed. But on Tuesday, Rite Aid got its biggest jolt ever, rising more than 40 percent. That increased its valuation from 11 to 13 times Ebitda, which is still slightly lower than what Bloomberg calculates Walgreens paid last year for Alliance Boots, a European operator of pharmacy and beauty stores. Walgreens, which reports earnings Wednesday, had about $4.5 billion of cash and equivalents and $16 billion of debt as of May.

At the $9-per-share offer price, Walgreens should break even on the acquisition, according to data compiled by Bloomberg. That's without taking into account any cost savings, which Walgreens estimates will exceed $1 billion. Still, the $17.2 billion transaction ($9.4 billion excluding net debt) seems to be more strategic in nature as Walgreens looks to secure a stake in another part of the industry food chain. Its own stock rose 6.4 percent Tuesday.

The bid is 45 percent higher than Rite Aid's unaffected 20-day trading average -- one of the biggest takeover premiums the health-care industry has seen this year. For Rite Aid shareholders, that's not a tough pill to swallow.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net