Walgreens And Rite Aid Deal Is Back On Track And Both The Companies Are Expected To Gain

After backing out just before their merger deadline on July 7th this year, it seems the Walgreens-Rite Aid deal is once again a possibility with the recent regulatory clearance. Under the terms of the new restated and amended purchase agreement, Walgreens will now buy 1,932 stores, three distribution centers, and other inventory from Rite Aid for an amount of around $4.4 billion in cash and other consideration. Rite Aid also will have the option to buy generic drugs at similar costs like Walgreens for 10 years through a Walgreens affiliate. The deal has been approved by both the companies’ board of directors and is awaiting some customary closing requirements.

The store purchases by Walgreen will begin next month and are expected to be completed by the spring of 2018. The purchased stores will come under the Walgreens brand name over time. Rite Aid will provide certain transitory services to Walgreen for up to 3 years post the completion of the transaction, according to the changed agreement. Through this transaction, Walgreens expects to realize annual synergies due to cost savings, procurement etc. to the tune of $300 million per year for a period of four years.

The Failed Deal Before This…

Initially, there was a proposal wherein Walgreens was slated to acquire all of Rite Aid’s store for a price of $9 a share or approximately $9.4 billion in total, and the deal was expected to be completed in the second half of 2016. However, the proposal date got postponed to January 2017 as the companies could not find suitors for required divestitures of Rite Aid stores. In December 2016, Fred’s became a key stakeholder in the acquisition between the two companies when it agreed to buy 865 of Rite Aid’s stores in order to satisfy the concerns of the regulatory authorities.

However, the two companies once again pushed back the deal deadline in January by another six months as they were yet to meet all the regulatory requirements. Walgreens altered the terms this time around by reducing the price per share, from $9 to $6.50-$7, depending on the number of store divestitures, which was increased from 865 to between 1,000 to 1,200. In May of this year, the two companies issued “certified compliance,” thereby meaning that if the FTC did nothing within the set time limit of sixty days, the deal was to go through. But, days before the deadline of July 7th 2017, the termination of the deal was announced and it was decided that Walgreens would purchase 2,186 Rite Aid stores for a price of $5.175 billion. This would still make Walgreens the biggest pharmaceutical retail chain in the U.S., outnumbering CVS in store count.

How Might Both The Parties Be Impacted By This Deal?

• Walgreens

The addition of 1,932 stores, to its currently operating 8,138 stores, might give Walgreens an edge over one of its biggest competitors, CVS, which has a store count of 9,676. Additionally, since the new deal does not currently involve any debt, Walgreens’ capital structure should remain unaffected by Rite Aid’s highly levered structure.

• Rite Aid

Though the deal’s execution implies a lower store count for Rite Aid, yet this might be a good opportunity for its management to concentrate its resources on improving the performance of its remaining stores. The clause that allows Rite Aid to procure supplies from Walgreens’ affiliates at lower costs might help in the improvement of Rite Aid’s bottom line, as well.

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