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WBA, Rite Aid look ahead after FTC acts

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NEW YORK — Wall Street analysts say the fog around Walgreens Boots Alliance Inc. and Rite Aid Corp. is set to clear after a nearly two-year process that culminated in an unsuccessful merger and a deal to sell over 40% of Rite Aid’s stores to WBA.

The Federal Trade Commission late last month approved a downsized agreement in which WBA will buy 1,932 stores, three distribution centers and related inventory from Rite Aid for $4.375 billion. Rite Aid also gets an option to join the Walgreens Boots Alliance Development (WBAD) group purchasing organization, which would enable Rite Aid to procure generic drugs at a cost similar to that of Walgreens for 10 years.

The amended transaction allows Rite Aid to hold onto 254 more stores than under the deal announced June 29. The smaller store sale also came about 23 months after the Walgreens-Rite Aid merger proposal on October 27, 2015, which ended up being dropped because of the FTC’s antitrust concerns.

Jefferies analyst Brian Tanquilut called the FTC’s green light to the latest deal “a clearing event” for WBA.

“FTC approval of the new Rite Aid asset purchase finally removes the regulatory overhang that’s clouded the [WBA] stock’s story over the last 24 months,” he wrote in a research note. “We believe investors will now be able to refocus on WBA’s positive underlying fundamentals — preferred network Rx gains, Beauty Differentiation redesign and WBAD’s growing purchasing power — the anticipated greater than $300 million in synergies from the approved Rite Aid transaction and a robust share repurchase program.”

Plans call for the purchases of the Rite Aid stores — mainly in the Northeast and South — to start this month and wrap up next spring, and eventually adopting the Walgreens ­banner.

That positions Walgreens to become the nation’s biggest chain drug retailer, with roughly 10,100 U.S. drug stores, compared with about 9,700 stores for No. 2 CVS Health. Rite Aid will have about 2,600 stores after the sale is completed, along with its EnvisionRx, RediClinic and Health Dialog businesses.

“This now gives WBA over 10,000 stores in the U.S., modestly ahead of CVS, and provides WBA the opportunity to reduce costs. We would anticipate WBA to consolidate stores over time, particularly in the Northeast,” stated Wolfe Research analyst Scott Mushkin. “With the revised asset purchase agreement outlined in June anticipated to be modestly accretive in the first full year post-close, we would anticipate the benefits of the transaction, including synergies, to build over the next few years.”

Mushkin said in a research note that he believed the store count in the Rite Aid asset sale might have been cut further. “Given the market share concentrations, we are not surprised to see a downwardly revised number of stores acquired — 1,932 from 2,186 — but are still somewhat surprised the FTC went along with the revised asset light transaction,” he wrote.

With the Rite Aid stores, Walgreens will see its market presence swell in the Northeast and South, Tanquilut noted in his report. “Excluding potential store closures, our state-by-state analysis reveals that WBA will now be the largest drug store operator by store count in eight additional states — Alabama, Georgia, Maine, North Carolina, New York, Rhode Island, Vermont and West Virginia — bolstering their already large market share in the Northeast and Southeast, now positioning WBA as the largest operator in 32 states ­nationwide,” he explained.

Though Rite Aid will lose close to half of its 4,500-plus drug stores with the sale, the company will be on more solid footing, Zacks Investment Research reported.

“The deal will make Rite Aid a smaller, but stronger firm with lesser exposure to the pressures of unfavorable pharmacy reimbursement rates, which has been a hindrance for the company for quite some time,” Zacks observed in an analysis of the agreement.


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