NEW YORK — Walgreens Boots Alliance Inc. (WBA) and Rite Aid Corp. have agreed to sell 865 Rite Aid stores and related assets to Fred’s Inc. for $950 million in cash.
The deal is subject to approval by the Federal Trade Commission as well as approval and completion of the pending WBA acquisition of Rite Aid and other customary closing conditions.
“We are pleased to have found an experienced pharmacy operator for these stores,” says Stefano Pessina, executive vice chairman and chief executive officer of WBA. “With this agreement, we are moving ahead with important work necessary to obtain approval of our acquisition of Rite Aid.”
The agreement, widely rumored for weeks, is a response to concerns expressed by the FTC in its review of the proposed Walgreens-Rite Aid merger, announced in October 2015. In October 2016 WBA and Rite Aid said they were extending the closing deadline of their merger agreement to early 2017 to give them time to divest between 500 and 1,000 stores to comply with the FTC.
At that time, it was rumored that Kroger Co. was interested in a possible purchase of stores. But a Reuters report said the nation’s largest supermarket operator balked because the FTC would not permit it to shut acquired Rite Aid locations near Kroger stores and integrate their pharmacies with its supermarket pharmacies. Yet, as recently as mid-December, reports by the Cincinnati Business Journal and other media said Kroger was poised to make a deal.
In mid-November, while speaking at the Morgan Stanley Global Consumer & Retail Conference, WBA co-chief operating officer Alex Gourlay said the company had multiple buyers for Rite Aid divestitures, which raises the question whether further divestitures will be announced.
WBA had originally expected to divest fewer than 500 stores to obtain regulatory clearance for its acquisition of Rite Aid in a deal valued at $17.2 billion. WBA operated 8,175 Walgreens and Duane Read drug stores in the U.S., Puerto Rico and the Virgin Islands as of August 31, 2016, while Rite Aid fields nearly 4,600 stores in 31 states and the District of Columbia.
In September, however, WBA announced that it expected to have to shed 500 to 1,000 stores to get a green light from the FTC, and rumors quickly began to circulate regarding prospective buyers. At various times, Albertsons Cos., Publix Super Markets Inc. and CVS Health were mentioned as candidates, in addition to Kroger.
If approved, the sale to Fred’s would make the Memphis-based discount/pharmacy retailer the nation’s fourth-largest drug chain, with about 1,500 stores and more than 1,200 pharmacies. Fred’s currently operates 647 general merchandise discount stores (371 of which contain full-service pharmacies) in 15 Southeastern states.
Under the agreement with WBA and Rite Aid, Fred’s is obligated to buy any additional stores if the FTC requires the divestiture of more than the 865 outlets in the present deal.
However, the FTC likely will be satisfied with the Fred’s transaction as it stands, according to retail analyst Brian Tanquilut of Jefferies LLC. “We believe regulators will view WBA’s proposed sale of 865 units to Fred’s as an acceptable solution to antitrust concerns, as the deal creates a larger, more viable competitor to WBA and CVS, and Fred’s management seems committed to keeping the stores open, as opposed to closing stores and transferring prescription files, which was previously a concern of the FTC,” he wrote in a research note.
Tanquilut estimates the WBA-Rite Aid merger could deliver as much as 64 cents per share in earnings to WBA by 2020, with productivity improvements in the acquired Rite Aid stores adding another 30 cents per share. “We believe the long-term upside opportunity with Rite Aid lies in improving the chain’s productivity levels via capital investments and rebannering in some markets. Raising Rite Aid store productivity to 80% of WBA’s average could yield another 30 cents of earnings per share longer term,” he stated.
Still, Tanquilut says that boosting the Rite Aid stores’ productivity won’t be easy, since many have had lower productivity for years, in some cases due to unfavorable locations.