Originally WBA said it was willing to divest up to 1,000 Rite Aid stores for clearance of the Walgreens-Rite Aid merger transaction. The companies also agreed to reduce the offer price for the deal by at least $2 billion.
The original offer in October 2015 called for WBA to pay $9 per share, or about $9.4 billion, and assume more than $7 billion in net debt, for a total deal value of $17.2 billion. The new terms would call for WBA to pay $6.50 to $7 per share, depending on how many stores wind up being divested, or between $6.8 billion and $7.4 billion, plus the assumption of the debt. That would bring the total deal value to $14.6 billion to $15.2 billion.
The store divestiture total will affect the ultimate share price for the WBA-Rite Aid deal. The price will be $7 per share if 1,000 stores or fewer are divested and $6.50 per share if the figure is 1,200. If the required divestiture falls between 1,000 and 1,200 stores, the price per share will be adjusted pro rata.
Prospective buyer Fred’s Inc. reaffirmed its $950 million offer to buy 865 Rite Aid stores, and has said it would purchase additional stores to the extent the FTC requests that more be sold and WBA agrees to sell them.
Fred’s has amended a revolving credit facility so that it can finance the acquisition of additional Rite Aid stores. According to a filing with the Securities and Exchange Commission, Fred’s is increasing its revolving loan commitment to $225 million from $150 million. Among other provisions, the February 2 SEC filing said “the amendment contemplates that up to $15 million of borrowings under the revolving loan facility may be used in connection with the acquisition of up to 10 Rite Aid stores pursuant to the terms of that certain asset purchase agreement, dated as of Dec. 19, 2016, by and among the company [Fred’s], Rite Aid Corp. and Walgreens Boots Alliance Inc.”
Some are speculating that the FTC might be worried about Fred’s ability to successfully manage the acquired outlets as viable stores going forward. Fred’s is a regional chain, based in Memphis, that currently has about 650 stores. The acquisition of even the original 865 Rite Aid stores would more than double the size of the chain.
That may worry regulators who recall Albertsons’ acquisition of Safeway in 2015. That deal won FTC approval after the companies agreed to sell 168 grocery stores. Haggen Inc., a small grocery chain based in Bellingham, Wash., bought 146 of those stores, expanding into competitive new markets in California, Nevada and Arizona, and dramatically increasing in size. (Haggen started the year with just 18 stores in Washington and Oregon.)
The acquisition went badly, and by the end of 2015 Haggen had filed for Chapter 11 bankruptcy protection, and Albertsons had bought back some of the stores it had divested. By June 2016 Albertsons had acquired 15 core Haggen stores in Washington that now operate as a separate business unit under the Haggen banner.
Although the acquisition of the Rite Aid stores by Fred’s would not pose a challenge of the same scale to the latter, the history of the Haggen deal may be making FTC regulators cautious.
Before WBA agreed to sell the Rite Aid stores to Fred’s, it had received a higher offer for the stores from the private equity firm Cerberus Capital Management LP. Had that deal been accepted, the acquired stores would have become part of Albertsons, which is itself owned by a group of investment firms led by Cerberus.
WBA and Rite Aid reportedly opted not to sell the stores they needed to divest to Cerberus because they worried that such a deal would not win favor with the FTC. The agency is seen as not favoring private equity buyers in cases like this, on the grounds that such firms are more likely to buy and then quickly sell businesses, and therefore do not bring long-term competition to an industry.
WBA and Rite Aid have pushed the deal’s end date to July 31 — after a previous extension expired January 27 — to give them extra time to gain regulatory approval. Besides FTC approval, the amended agreement is subject to approval by Rite Aid shareholders as well as other customary closing conditions.