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A momentous development for three Rx chains

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The agreement struck last month for the sale of 865 Rite Aid Corp. drug stores to Fred’s Inc. is a momentous development for those companies, as well as Walgreens Boots Alliance, which after 14 months is still working to finalize the acquisition of Rite Aid.

The $950 million all-cash deal will bring Fred’s stores and related assets in the eastern and western United States, significantly expanding its reach beyond its traditional base in the South. For WBA and Rite Aid, the divestiture is intended to overcome antitrust concerns the Federal Trade Commission reportedly has about the combination of the nation’s second- and third-largest drug chains.

Government regulators remain principal actors in the fate of both pending deals. The sale of the Rite Aid stores to Fred’s is contingent upon the endorsement of the FTC, as well as that body’s approval of the Walgreens-Rite Aid merger. The hope is that the transactions will be finalized during the first half of 2017.

cdr-filler-opinion-750If everything goes according to plan, the outcome will represent a significant victory for WBA and vice chairman and chief executive officer Stefano Pessina, the chief architect of the company’s global empire. By acquiring Rite Aid, WBA will push its store count in the United States to around 12,000, some 2,000 more than arch rival CVS Pharmacy.

Pessina is confident the larger store base will enable Walgreens to capitalize on economies of scale, including enhanced buying power and synergy savings of more than $1 billion three to four years after the merger. The added locations will enhance the attractiveness of Walgreens’ pharmacy network in the competition for third-party business and give it a broader platform for selling front-end merchandise, including such proprietary brands as No7 and Soap & Glory.

The merger with WBA will bring Rite Aid’s history as an independent entity to a dignified end. Under the leadership of chairman and CEO John Standley, corporate president and CEO of stores Ken Martindale and the management team they assembled, the company for the better part of the last decade has been one of the most innovative and exciting players in retailing and health care. Rite Aid helped raise the bar in such areas as loyalty programs, store formats and pharmacy service. It also enlarged the scope of its capabilities through strategic acquisitions in the PBM, in-store clinic and total population health management sectors.

Impressive as Rite Aid’s turnaround has been, the company was never able to entirely escape from the effects of a large debt burden stemming from mismanagement dating back to the late 1990s. It would have been interesting to see how different the industry might look today if Standley, Martindale and company had started on a level playing field.

The biggest challenges and greatest opportunities await Fred’s and its CEO, Mike Bloom. In one fell swoop, the company will more than double its store count, adding the 865 Rite Aid locations to its 647 existing units. Moreover, the acquisition solidifies and accelerates the transformation of Fred’s from a retailer that emphasizes discount general merchandise to one focused on health care. The track record of relatively small retailers making disproportionately large expansion moves is, at best, mixed. One prominent example from the chain drug industry of such a deal gone wrong was the Jean Coutu Group’s takeover of Eckerd Corp. in 2004.

The geographic extent of the new Fred’s will present another challenge. Although the parties involved in the deal say that they won’t reveal specific locations until the WBA-Rite Aid merger is completed, analysts at Jefferies, an investment banking firm, expect Fred’s to pick up a substantial number of stores in California, Florida, North Carolina and Washington.

Concurrent with the assimilation process, Fred’s management will have to reorient the company, which already has a substantial prescription drug business and solid specialty pharmacy capabilities, toward health care. As Bloom noted during a recent conference call, the retailer must build strategic relationships with other health care providers and payers as it remakes its business model.

To manage those tasks simultaneously is a tall order. The good news for Fred’s is that in Mike Bloom, who spent most of his career at CVS, it has a leader who knows what it takes to operate a successful pharmacy chain and is ready for the work that lies ahead.


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