NEW YORK — With the acquisition of Rite Aid Corp. by Walgreens Boots Alliance Inc. (WBA) now canceled and replaced by a smaller transaction, the chain drug landscape will retain a more familiar look.

Nonetheless, all three parties to the original deal, which involved the purchase of 865 Rite Aid locations by Fred’s Inc., will face questions going forward.

If anything, WBA appears likely to emerge stronger if the new agreement — which calls for it to purchase 2,186 Rite Aid stores, three distribution centers and related inventory for $5.18 billion in cash — is approved by the Federal Trade Commission. Unlike the original deal, which involved the payment of approximately $9.4 billion, or $9 per share, and the assumption of more than $7 billion of Rite Aid debt, under the new pact WBA takes on none of Rite Aid’s debt and can maintain a healthier balance sheet.

WBA will, however, pay Rite Aid a termination fee of $325 million in cash. With the termination of the Walgreens-Rite Aid merger agreement, the related asset divestment agreement to sell 865 stores to Fred’s Inc. was also canceled.

“Overall, I view this deal as being more attractive than the transaction it replaces, recognizing the adjustment and compromises that we have had to make since the original deal was announced, in what continues to be a challenging market for pharmacy,” said Stefano Pessina, WBA’s executive vice chairman and chief executive officer, during a conference call. “We expect that this deal will deliver synergies in excess of $410 million per annum within three to four years of the initial closing and be modestly accretive to adjusted earnings per share in the first full year after the initial closing.”

WBA’s Stefano Pessina and Rite Aid’s John Standley

The stores slated for purchase under the smaller WBA-Rite Aid deal, moreover, are “more than enough” to enable the optimization of Walgreens’ expanded pharmacy network, Pessina added, and should create the opportunity for even greater efficiencies beyond the estimated synergies from the deal.

The stores to be acquired are located mainly in the Northeast, Mid-Atlantic and Southeast, while the distribution centers are situated in Dayville, Conn.; Philadelphia; and Spartanburg, S.C. The latter is a relatively new facility, having opened in June 2016.

According to WBA co-chief operating officer Alex Gourlay, the stores being acquired represent roughly the average profitability, “maybe slightly less,” of the Rite Aid store base overall. They will, he added, enable Walgreens to fill in its markets in the three regions.

WBA is now embarking on the second phase of its transformation plan, which will concentrate on further merchandising and operational changes in the Walgreens network. The integration of the Rite Aid stores should form a natural extension of the phase two processes.

For Rite Aid the future looks far less clear. The company has declared that it expects to use “a substantial majority” of the net proceeds of the sale to pay down its existing debt, which will lighten its balance sheet and reduce its debt service obligations. Moreover, federal tax gains from the sale will be largely offset by the carry-forward of its net operating loss, resulting in a minimal tax payment on the transaction.

In addition, Rite Aid will have the option to purchase generic drugs through an affiliate of WBA, at a cost substantially equivalent to Walgreens’ cost, for a period of 10 years. That could be an important benefit, because Rite Aid’s recent financial results are showing that its retail pharmacy business is under severe pressure from lower reimbursement rates and new generic drug introductions.

“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 drug store chain and pharmacy benefits manager with a compelling footprint in key markets,” said chairman and CEO John Standley in a statement. “The 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.”

However, it is unclear how many of Rite Aid’s remaining 2,337 locations have been converted to the chain’s Wellness format. The company has stated that the Wellness stores significantly outperform the chain average.
Additionally, with a store base reduced by nearly half, Rite Aid will have far less scale to bring to the table in negotiating terms on front-end products. The company’s EnvisionRx pharmacy benefits manager will likely loom larger than ever as a source of revenue and profit growth moving ahead.

It is also unclear what the ultimate impact of the acquisition’s termination will be on Fred’s, which stood to become the third-largest drug store operator in the country through the proposed purchase of 865 Rite Aid stores.

President and CEO Mike Bloom downplayed any negatives in a statement. “While the acquisition of additional stores was an opportunity for growth, we always viewed it as a potential outcome that would accelerate our transformation, not define it,” he said.