Final agreement includes 254 fewer stores than offer in June

DEERFIELD, Ill. — Winding down a process that has taken nearly two years, Walgreens Boots Alliance Inc. has gained Federal Trade Commission approval to acquire 1,932 stores, three distribution centers and related inventory from Rite Aid Corp. for $4.375 billion in cash.

The companies said Tuesday that the transaction also includes the WBA’s assumption of related real estate leases and an option for Rite Aid to become a member of Walgreens Boots Alliance Development GmbH, WBA’s group purchasing organization for pharmaceuticals.

Exercisable through May 2019, the group purchasing option would enable Rite Aid to procure generic drugs at a cost substantially equivalent to that of Walgreens for a period of 10 years. WBA also will assume certain limited store-related liabilities as part of the new transaction.

With the amended deal, Rite Aid will retain 254 more stores than under the agreement announced June 29, which reduced the transaction sale price. The companies said the decision for Rite Aid to retain these stores stems from talks between Rite Aid and WBA and with the FTC.

Stefano Pessina

In announcing the agreement in June, WBA and Rite Aid terminated their $14 billion merger deal and unveiled a new deal in which WBA would buy 2,186 stores as well as the three distribution centers and related inventory from Rite Aid for $5.175 billion in cash.

Store purchases are slated to begin in October and be completed in spring 2018. After all stores are acquired, they will be converted to the Walgreens brand in carefully planned phases over time, WBA said.

Both the WBA and Rite Aid board of directors have approved the updated agreement, which remains subject to customary closing conditions. The transaction doesn’t require shareholder approval.

WBA’s original acquisition offer for Rite Aid on Oct. 27, 2015, was for $9 per share and the assumption of over $7 billion in net debt, for a total deal value of $17.2 billion. After more than a year of negotiations with the FTC, the companies unveiled a revised the merger agreement on Jan. 30, 2017. The price for that deal was $6.50 to $7.00 per share, putting the cash portion at about $6.84 billion to $7.37 billion — depending on the number of stores divested — plus the assumption of Rite Aid’s debt.

But when continued talks for antitrust approval from the FTC made little headway, WBA and Rite Aid decided to terminate the Walgreens-Rite Aid merger deal and announced the store sale agreement in late June, which was modified with the transaction unveiled Tuesday.

“This is a significant moment for our company, and we are excited about the opportunities this agreement will deliver for our customers and patients, employees and investors,” WBA executive vice chairman and chief executive officer Stefano Pessina said in a statement.

The deal will eventually give Walgreens about 10,100 U.S. drug stores, making it the nation’s largest chain drug retailer.

John Standley

“Combining Walgreens’ retail pharmacy network with a strong portfolio of Rite Aid locations is expected to help us achieve enhanced, sustainable growth while enabling us to broaden our reach and provide greater access to convenient, affordable care in more local neighborhoods across the United States,” Pessina noted. “We are confident in the path ahead and look forward to working together to shape the future of health care and deliver on the full potential these stores bring to our network.”

The stores to be purchased are located mainly in the Northeast and the South. The three distribution centers are in Dayville, Conn.; Philadelphia; and Spartanburg, S.C. The companies said the transition of the distribution centers to Walgreens won’t begin for at least 12 months.

After the sale is completed, Rite Aid have about 2,600 stores and six distribution centers as well as its pharmacy benefit manager EnvisionRx, retail health clinic operator RediClinic and health coaching and analytics firm Health Dialog.

“Securing regulatory clearance provides us with a clear path forward to realize the benefits of this transaction,” Rite Aid chairman and CEO John Standley stated. “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.”

Also under the amended agreement, Rite Aid will provide transition services to WBA for up to three years after the closing of the transaction.

“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,” Standley added. “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.”

Rite Aid said it plans to use most of the net proceeds from the transaction to repay debt. WBA said it expects the new deal to yield annual synergies of more than $300 million, fully realized within four years of the initial closing of the transaction and derived mainly from procurement, cost savings and operations.