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Walgreens Finally Gains Approval To Acquire 1,932 Rite Aid Stores In Slightly Smaller Deal

The Walgreens Boots Alliance (Walgreens) acquisition of many of Rite Aid Corp’s stores finally gained regulatory approval on September 20. The renegotiated deal comes after the Federal Trade Commission (FTC) reportedly would only authorize the deal if Walgreens reduced the number of stores it would gain in the purchase. The new deal finds Walgreens acquiring 1,932 stores, three distribution centers and related inventory from Rite Aid for an all-cash purchase price of $4.375 billion on a cash-free, debt-free basis.

That deal was restructured from a July 2017 agreement in which Walgreens would have purchased 2,186 units from the Camp Hill, PA-based drug chain. However, multiple sources reported that the FTC pushed back against that revised deal and sought for Walgreens to further reduce the number of Rite Aid stores it would.

Originally, Walgreens had proposed a total takeover of Rite Aid. In October 2015, the Deerfield, IL-based chain announced it had entered a definitive agreement to acquire all outstanding shares of Rite Aid for $9.4 billion. The proposed acquisition would have made Walgreens the largest drug chain in the U.S., with 12,800 locations. However, despite Walgreens CEO Stefano Pessina’s assurances that the company had thoroughly analyzed potential anti-trust issues and expected no more than 500 store closures would be necessary, along with two extensions of the deadline for FTC approval, it was not gained, and the original plan was scrapped.

An amended plan was put forth earlier this year to accommodate more store divestitures than had originally been planned, and the price of the deal was also trimmed at that time to $6.8 billion. The amended plan included a separate agreement to reportedly sell approximately 865 Rite Aid units to Fred’s Inc., a Memphis-based regional drug and discount chain that currently operates about 600 stores in the South and Midwest.

However, that agreement did not secure FTC approval either and was scrapped, leading to the current arrangement.

The 1,932 store gain by Walgreens will certainly change the market landscape, particularly in the Northeast where the Chicago area firm will gain an additional 1,038 drug stores.

On a state-by-state basis, here’s the breakout of Walgreens’ new stores, along with the number of Rite Aid stores still operating in those Northeast states: Connecticut – 43 new Walgreens (34 remaining Rite Aids); Delaware – no new Walgreens (42 remaining Rite Aids); Maine – 0 (79); Maryland – 96 (43); Massachusetts -134 (10); New Hampshire – 6 (62); New Jersey – 118 (133); New York – 273 (323); Pennsylvania – 2 (534); Rhode Island – 43 (0); Vermont – 31 (6); West Virginia -103 (0); and Washington, DC -7 (0).

Rite Aid also has the option to purchase generic drugs that are sourced through an affiliate of WBA at a cost substantially equivalent to Walgreens for a period of 10 years. Under the amended and restated agreement, Rite Aid will retain approximately 250 additional stores as compared to the prior agreement announced between Rite Aid and WBA in June 2017, resulting in a reduction in the transaction sale price. The decision to retain these stores follows discussions between Rite Aid and Walgreens, as well as the FTC.

The final deal will result in Walgreens becoming the nation’s largest drug chain with more than 10,000 locations, followed by CVS with about 9,500 stores nationally. Rite Aid, with approximately 4,500 stores, falls to a distant third.

Rite Aid chairman and CEO John Standley said of the new deal: “Securing regulatory clearance provides us with a clear path forward to realize the benefits of this transaction. With a compelling and more profitable store footprint in key markets, enhanced purchasing capabilities and a stronger balance sheet and improved financial flexibility, we are well positioned to implement our plans to deliver improved results.”

Standley continued, “I am proud of our entire Rite Aid team for their extraordinary efforts during this process and their tremendous dedication to taking great care of our customers and patients. We are committed to supporting a smooth transition as we remain focused on delivering a great customer experience, improving our business and creating value for all of our stakeholders.”

The 1,932 stores included in the amended agreement are primarily located in the Northeast and Southern regions of the United States. The three distribution centers are located in Dayville, CT, Philadelphia and Spartanburg, SC. Under the terms of the amended agreement, Rite Aid will provide certain transition services to WBA for up to three years after the closing of the transaction.

The transaction has been approved by the boards of directors of Rite Aid and WBA and is still subject to other customary conditions. Approval of the transaction does not require a shareholder vote. Rite Aid and WBA expect to transfer ownership of the stores in phases beginning in October 2017, with the goal of completing the transfer of all stores in spring of 2018.

Rite Aid expects to use a substantial majority of the net proceeds from the transaction to repay existing indebtedness, which will improve the company’s leverage levels. Rite Aid also expects that the gain it will record on the sale of the assets will be largely offset by its net operating loss carry-forwards, resulting in a minimal cash tax payment on this transaction.

Immediately following the completion of the transaction, Rite Aid will continue to operate approximately 2,600 stores and six distribution centers as well as EnvisionRx, its pharmacy benefit manager, RediClinic and Health Dialog. The company will leverage the capabilities of these subsidiaries to deliver a higher level of care in the communities it serves.

In related Rite Aid news, the drug chain has hired Kermit Crawford, former EVP and president of Walgreens pharmacy, health and wellness division, as its new president and COO. That job became available after Ken Martindale left Rite Aid last month to become chief executive of GNC Holdings.