Walgreens Ends 21-Month Quest To Acquire Rite Aid Corporation

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Walgreens has ended its two-year quest to take over rival drug chain Rite Aid Stores, saying it would change its focus to acquiring about half of the Camp Hill, PA based retailer’s locations in a new $5.175 billion deal. The move came as U.S. regulators continued to resist the proposed acquisition.

The newly proposed deal would see Walgreens acquire 2,186 stores, three distribution centers and related inventory from Rite Aid. The units included represent about 48 percent of Rite Aid’s entire store fleet and are primarily located in the Northeast, Mid-Atlantic and Southeast U.S. The three DCs included are located in Dayville, CT, Spartanburg, SC and Philadelphia. As with its original acquisition effort, this deal would also need approval from the Federal Trade Commission and other U.S regulators.

The newly revised store and distribution centers-only acquisition proposal would negate the original $9.4 billion purchase proposal, first made in October 2015, by the Deerfield, IL-based drug chain. That plan had to be amended earlier this year to accommodate more store divestitures than had originally been envisioned – and the price of the deal was also trimmed at that time to $6.8 billion. The amended plan also 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.

Walgreens had twice extended the deadline, hoping for FTC approval of the deal (this time until July 27), before pulling the plug on June 29 and announcing this new proposal.

Originally, the two drug chains had expected to sell no more than 500 stores in order to ease regulators’ terms. However, that number eventually expanded to 1,200, making the sale to Fred’s a necessity for the overall merger to be successful. With the new proposal, the Fred’s deal is also cancelled.

In a release accompanying the announcement of the new agreement, Stefano Pessina, Walgreens’ CEO, said: “This new transaction extends our growth strategy and offers additional operational and financial benefits. It will allow us to expand and optimize our retail pharmacy network in key markets in the U.S., including the Northeast, and provide customers and patients with greater access to convenient, affordable care. We believe this new transaction addresses competitive concerns previously raised with respect to the prior transaction and will streamline and simplify the transition for customers, team members and other stakeholders.”

Once the initial transaction has been finalized, Walgreens said, it will begin acquiring the stores and related assets over a period of about six months and will convert them to the Walgreens brand over time. Walgreens has agreed to pay Rite Aid a $325 million termination fee, in cash. It will also pay Fred’s an additional $25 million termination fee for the related asset deal.

Walgreens will also assume the related real estate leases and certain limited store-related liabilities. Rite Aid will have an option, exercisable through May 2019, to become a member of Walgreens’ group purchasing organization.

At presstime, no specific store locations that are slated to be sold to Walgreens had been announced.

Rite Aid CEO John Standley said, “While we believe that pursuing the merger with WBA was the right thing to do for our investors and customers, this new agreement provides a clear path forward and positions Rite Aid as a strong, independent, multi-regional drugstore chain and pharmacy benefits manager with a compelling footprint in key markets. This transaction offers clear solutions to assist us in addressing our pharmacy margin challenges and allows us to significantly reduce debt, resulting in a strong balance sheet and improved financial flexibility moving forward.”