Fate of WBA-Rite Aid deal hangs in balance

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The major question in mass retailing this year, as the industry concludes the second month of 2017, is when — and indeed whether — Walgreens Boots Alliance’s acquisition of Rite Aid will be fruitfully concluded.

As anyone who really cares knows by now the deadline for finalizing the Walgreens-Rite Aid merger has been extended to midyear, and the price has been reduced.

Specifically, the companies announced on January 30 that the deal end date has been moved to July 31 — the previous extension had just expired — to give them extra time to gain regulatory approval from the Federal Trade Commission.

Meanwhile, the revised price for WBA to acquire Rite Aid has been reduced to a minimum of $6.50 per share and a maximum of $7.00 per share, which would lower the cash portion of the transaction to approximately $6.84 billion to $7.37 billion, plus the assumption of Rite Aid’s debt. The original acquisition offer on October 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.

cdr-filler-opinion-750WBA also upped the number of stores that could be divested to win antitrust clearance of the merger. The company said it is now willing to divest up to 1,200 Rite Aid stores and certain other assets if necessary for regulatory approval. That would be 200 more stores than the up to 1,000 locations that WBA said it was willing to divest originally. WBA had initially said it expected to have to divest less than 500 stores but then in early September raised that figure to between 500 and 1,000.

But those changes don’t guarantee that Walgreens will ultimately own the majority of Rite Aid drug stores.

Indeed, the WBA-Rite Aid deal has already assumed a character of its own. By today’s standards, it’s not a particularly large transaction. Nor does it appear to unnecessarily limit drug store or mass retail competition. True, Walgreens will have to divest some Rite Aid stores, and indeed the primary ­sticking point in the deal is just how many. Walgreens has indicated its willingness to sell off more than it originally planned, but surely there is a point beyond which Walgreens will not go to secure the deal.

So perhaps time it’s time to at least consider what will happen if the deal falls through, and WBA fails to acquire Rite Aid.

Walgreens Boots Alliance has a lot going for it these days, Rite Aid aside, and many opportunities will present themselves in the event that the Rite Aid acquisition fails to survive the protracted government look at the divestiture issue. Still, WBA has spent lots of time, money and energy analyzing the acquisition, and its failure would halt, for a time, the global drug retailing and wholesaling company’s hectic rush to achieve chain drug supremacy in the United States.

Momentum is a major factor in retailing growth, and a breakdown in WBA’s quest to acquire Rite Aid will certainly do it no good on that front.

For Rite Aid, the stakes are higher. The retailer’s acquisition, by Walgreens or any other viable retailer, will spell an acceptable end to Rite Aid’s history, one that will mark a worthy close to a sometimes brilliant, sometimes stumbling retail presence.
Walgreens aside, not many mass retailers are in a position to acquire a drug chain of Rite Aid’s size and store dispersal. (Indeed, concerns about who would buy divested stores has been a complicating factor in the WBA-Rite Aid deal.)

Moreover, many Rite Aid staffers have come to accept this acquisition by WBA as an acceptable exit strategy for their company, and many have been working diligently toward that end. A breakdown in that effort now will likely slow considerably the momentum under which Rite Aid has been operating these past few years — and could result in the loss many of the strides the drug chain has made these past several years, strides many observers have correctly termed miraculous in transforming Rite Aid into a viable drug chain once more.

So the chain drug industry, which faces many issues as 2017 gets started, has among them only one it can rightly consider critical. An unhappy conclusion to the WBA-Rite Aid deal will do the mass retail community no good — and more likely could dampen, at least temporarily, the shine the industry has enjoyed in recent times.



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