The Federal Trade Commission ("FTC") seems to be getting harsher on drugstore chains Walgreens Boots Alliance Inc. WBA and Rite Aid Corp. RAD, which have been trying to appease the regulatory body since its initial merger pact in 2015. Per the latest developments and a word from sources, Walgreens is again planning to revise its deal to buy 2,186 Rite Aid stores, in order to get regulatory approval.
The FTC is now close to giving decision on the Walgreens-Rite Aid’s latest deal, where Walgreens will acquire the aforementioned Rite Aid stores and related assets for $5.175 billion. However, Walgreens, which has been closely working with FTC, is currently considering revising deal to resolve some regulatory concerns. Though the exact tweaking for the number of stores that will be bought was not made known, sources expect a revised deal to be brought to light as early as next week. This would give FTC another 30 days to review the new deal and give its decision.
Walgreens closed at $82.60, up a marginal 0.1% yesterday, while Rite Aid rose 3.8% to $2.73.
Moreover, Rite Aid has rallied 21.4% in the past month, outperforming the industry’s 4.8% growth. Meanwhile, Walgreens has improved only 2.5%, also lagging the industry’s gain.
The Background
Walgreens-Rite Aid had initially agreed to a merger agreement in October 2015, which fell apart after two years of investigation by the FTC in June 2017. Replacing the older agreement, Walgreens agreed upon a fresh bargain to buy 2,186 Rite Aid stores, associated distribution assets and inventory, for $5.175 billion as well as termination charges of $325 million.
The aforementioned stores to be sold are primarily situated in the Northeast, Mid-Atlantic and Southeastern parts of the United States. The three distribution centers, which are also part of the agreement, include those which are housed in Dayville, CT, Philadelphia and Spartanburg, SC. Further, the new transaction allows Rite Aid to buy generic drugs sourced through a Walgreen’s affiliate, at cost price for about 10 years. Meanwhile, Rite Aid will provide certain transition services to Walgreens for up to three years post the deal closure. The initial deal was approved by the directors of both companies.
Conclusion
The new deal to be put forward by Walgreens would mark the fourth revised proposal in the whole episode of establishing a successful transaction with Rite Aid.
If the deal materializes, Walgreens will become the No. 1 drugstore chain in the United States by size, leaving behind CVS Health Corp. CVS. Further, the sale of nearly half of its more than 4,500 stores would leave Rite Aid on the third spot. While Walgreens will gain from a significant expansion of its footprint, Rite Aid will be well poised to improve its financial leverage by paying down huge debts.
Both Rite Aid and Walgreens currently carry a Zacks Rank #3 (Hold).
Still Wanting Exposure in the Drugstore Segment?
Investors interested in the Drugstore space can invest in Herbalife LTD. HLF. The stock has gained whopping 40.2% year to date and has a VGM Score of A. Moreover, it currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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