Walgreens Boots Alliance, Inc. (WBA) and Rite Aid Corporation announced October 27 that they have entered into a definitive agreement under which Walgreens Boots Alliance will acquire all outstanding shares of U.S. retail pharmacy chain Rite Aid for $9.00 per share in cash, for a total enterprise value of approximately $17.2 billion ($9.4 billion in cash), including acquired net debt. The purchase price represents a premium of 48 percent to the closing price per share on October 26, 2015, the day before the agreement was signed. The deal is expected to close in the second half of 2016.
The deal would bring together the nation’s largest and third largest drug chains and create a network of approximately 12,700 stores in the U.S. and nearly 18,000 units globally. In the Mid-Atlantic region, the newly combined enterprise (before potential FTC overlap rulings) would operate about 2,240 stores with sales of nearly $10.4 billion. By comparison, CVS Health runs about 7,800 stores nationally and almost 1,500 in the Mid-Atlantic.
The FTC will not only scrutinize the store overlap issue (in about a dozen states, store counts would increase 100-200 percent), but are also likely to examine whether the huge size of the new company would give it unfair clout with pharmacy-benefits managers.
Walgreen acknowledged that it could be forced to divest up to 1,000 stores, but added that a figure of “less than half this number” would be more likely.
In a filing with the SEC, WBA CEO Stefano Pessina said his company has performed a thorough analysis of antitrust considerations, but regulators could come up with a different conclusion.
The Italian-born Pessina, who took the helm of the company in July of this year, said he believes the U.S, market is ripe for consolidation, especially since the government is more involved in paying for health care (primarily through the Affordable Care Act).
However, the pharmacy industry continues to be squeezed for profits due to lower reimbursement rates from health insurers and the federal government over the past the past three years. Walgreens’s margins in its U.S. pharmacy business dipped to 26.9 percent for its most recent fiscal year ended August 31. In fiscal 2014, that margin was 28.2 percent.
Walgreens Boots Alliance was created through the combination of Walgreens and Alliance Boots in December 2014. The company employs more than 370,000 people and has a presence in more than 25 countries.
In making the Rite Aid acquisition announcement, WBA said it is highly focused on building a differentiated in-store experience for health, wellness and beauty, and this combination will help accelerate Rite Aid’s own efforts toward that end. Once the acquisition closes, the Deerfield, IL-based drug and health/wellness chain plans to further transform Rite Aid’s stores to better meet consumer needs.
“Today’s announcement is another step in Walgreens Boots Alliance’s global development and continues our profitable growth strategy. In both mature and newer markets across the world, our approach is to advance and broaden the delivery of retail health, wellbeing and beauty products and services,” said CEO Pessina. “This combination will further strengthen our commitment to making quality healthcare accessible to more customers and patients. Our complementary retail pharmacy footprints in the U.S. will create an even better network, with more health and wellness solutions available in stores and online. Walgreens Boots Alliance will provide to Rite Aid its global expertise and resources to accelerate the delivery of integrated frontline care, and to offer innovative solutions for providers, payers and other entities in the U.S. healthcare system. Finally, this combination will generate a stronger base for sustainable growth and investment into Rite Aid stores, while realizing synergies over time.”
“Joining together with Walgreens Boots Alliance will enhance our ability to meet the health and wellness needs of Rite Aid’s customers while also delivering significant value to our shareholders,” said John Standley, chairman and CEO of Camp Hill, PA based Rite Aid. “This transaction is a testament to the hard work of all our associates to deliver a higher level of care to the patients and communities we serve. Together with Walgreens Boots Alliance, the Rite Aid team can continue to build upon this great work through access to increased capital that will enhance our store base and expand opportunities as part of the first global pharmacy-led, health and wellbeing enterprise.”
The transaction is expected to be accretive to Walgreens Boots Alliance’s adjusted earnings per share in its first full year after completion. Additionally, Walgreens Boots Alliance expects to realize synergies in excess of $1 billion.
Upon completion of the merger, Rite Aid will be a wholly owned subsidiary of Walgreens Boots Alliance, and is expected to initially operate under its existing brand name. Working together, decisions will be made over time regarding the integration of the two companies, ultimately creating a fully harmonized portfolio of stores and infrastructure.