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Postscript on Walgreens-Rite Aid merger saga

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Today would have been the day for the Federal Trade Commission to issue a decision on the Walgreens-Rite Aid merger, had Walgreens Boots Alliance and Rite Aid Corp. not elected to scuttle the deal and unveil a downsized transaction eight days ago.

Both companies said that, based on signals from the FTC, they thought WBA’s deal to acquire Rite Aid wouldn’t have been approved, which led to a smaller agreement that’s expected to be more competitively palatable to the agency.

Unusually, the FTC came out with a statement on the proposed merger after its termination, likely in response to investor criticism that the protracted antitrust review killed the deal (along with Fred’s agreement to buy up to 1,200 Rite Aid stores earmarked for divestiture).

“The commission staff thoroughly investigated the potential impact that the proposed Walgreens-Rite Aid merger may have had on competition and evaluated a number of divestiture proposals put forward by the parties,” the FTC stated. “Before the time the companies would have been free to close their transaction absent commission action, they voluntarily withdrew their HSR [Hart-Scott-Rodino] filings, and the matter is no longer before the commission.”

While the FTC’s perplexing comment may have raised questions about what might have been, one thing’s for certain: the Rite Aid drug chain will look much different.

Under the new deal with WBA, Rite Aid agreed to sell 2,186 stores, three distribution centers and related assets. That will shrink the Rite Aid chain from 4,523 stores in 31 states and the District of Columbia to 2,333 stores in 28 states, according to an investor presentation on the deal.

If the FTC OKs the revamped deal, Rite Aid would no longer have stores in Indiana, South Carolina, Utah and Washington, D.C.

The chain would also see substantial store reductions in New York (-456), North Carolina (-216, leaving just eight stores), Georgia (-174, leaving just two stores), New Jersey (-151), Massachusetts (-136, leaving 10 stores), Maryland (-127, leaving 13 stores), Kentucky (-114, leaving just two stores), Virginia (-105), West Virginia (-101, leaving just two stores), Alabama (-90, leaving just one store), Maine (-78, leaving just one store), Tennessee (-77, leaving just four stores), Connecticut (-55, leaving 22 stores), Louisiana (-48, leaving just four stores), Rhode Island (-42, leaving just one store), Mississippi (-24, leaving just one store) and Colorado (-17, leaving just four stores).

Rite Aid and WBA said they expect to finalize the new transaction in the next six months, pending FTC approval and other closing conditions.

“Walgreens and Rite Aid have publicly stated they have reached a new agreement relating to certain Rite Aid assets,” the FTC said in its statement. “The FTC will review any new transaction proposed by the parties under the statutes enforced by the commission, as may be applicable.”

Yet Wolfe Research analyst Scott Mushkin contends that competitive snags remain with the downsized deal and approval from the FTC isn’t a certainty.

“We struggle to see how a Rite Aid ‘light’ merger will be any more palatable to the FTC than the original transaction, as many of the East Coast markets WBA wants to purchase have clear market-share concentration issues,” Mushkin wrote in a research note. He added, “We would anticipate that the company would at a minimum need to divest a number of stores in certain markets, and there remains a strong possibility that the FTC could move to block the new proposal altogether.”


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