It looks like Walgreens Boots Alliance is getting down to brass tacks in its negotiations with the Federal Trade Commission to acquire Rite Aid.
The New York Post reported late Thursday evening that WBA is discussing store divestitures with the FTC and trying to get a bead on the number of Walgreens and/or Rite Aid locations that would need to be sold off to get approval for the roughly $17 billion deal, announced in October.
Citing anonymous sources, the Post article also said WBA “is now quietly auctioning stores in areas where the combined chain would have too much overlap” and that the search for buyers is adding to the length of negotiations.
In reporting third-quarter results on July 6, WBA stated that the Rite Aid acquisition is “progressing as planned” and that WBA “is continuing its integration planning and continues to expect the Rite Aid transaction to close in the second half of calendar 2016.”
And in a conference call that day, WBA executive vice chairman and CEO Stefano Pessina told financial analysts, “We still believe that our initial estimate is correct. We still believe that at the end we will stay in the range of the stores [to be divested] that we initially indicated, around 500.”
WBA has previously indicated that it’s willing to divest up to 1,000 stores to gain regulatory approval but expects divestitures to be less than half that number. Together, Walgreens and Rite Aid would create the largest U.S. chain drug retailer, with more than 12,700 stores.
While most industry observers seem to expect the acquisition to go through, some note that the FTC has taken a stronger stance against big mergers — citing the agency’s rejection of the Staples-Office Depot deal and its scrutiny of health insurer mergers. Nevertheless, in another large retail merger, the U.S. subsidiaries of Delhaize Group and Ahold NV are currently working through store divestitures to gain FTC approval for their $29 billion deal, which the companies said they expect to complete this month.
“WBA did note that it was in the process of finding buyers for the pharmacies that would need to be divested, but also noted that it still expected to be within its initial range of divested stores, which it anticipates to be roughly 500,” Wolfe Research analyst Scott Mushkin wrote in a July 7 research note on WBA’s third quarter.
According to Mushkin, WBA has “exuded confidence, in our opinion” that the FTC will ultimately sign off on the deal.
“This confidence appears to be derived from conversations the company is having with its attorneys that are dealing with the FTC. From our standpoint, we believe a transaction between WBA and RAD would be incredibly synergistic, in part due to the reduced competition that the merger would produce,” he said in his research report. “With that said, we have long recognized that while the deal seems to go directly against the FTC/DOJ horizontal merger guidelines, in the end the government may decide to approve the transaction, as it is the ultimate interpreter of what it deems allowable under those guidelines.”
Mushkin added that the FTC may decide to require WBA to divest more stores than it expected in the acquisition deal. “If there is a viable purchaser for a good number of the divested stores, this could be the path of least resistance and would still likely create some benefits, assuming the number of stores divested is not too great,” he wrote. “We would further note that if this were indeed an avenue, and store divestitures were above the threshold, it would likely mean WBA would pay less for Rite Aid.”