It looks like one divestment possibility for Walgreens Boots Alliance isn’t panning out as it works with the Federal Trade Commission to gain antitrust clearance for its acquisition of Rite Aid.
The New York Post reported this week that WBA hasn’t been able to sway private equity firms to buy a chunk of Walgreens and/or Rite Aid stores earmarked for selloff. The reason: These stores, numbering 650, lack the geographic concentration to form the basis of a viable retail drug store operation, the Post said.
That’s not surprising. After all, a big reason for the merger — and the consolidation in the chain drug industry in recent years (and longer) — is that the changing economics of pharmaceuticals have made scale paramount, and small players continue to get squeezed out of the market. So a 650-store operation would have a tough go of it these days — especially when you consider that after CVS, Walgreens and Rite Aid, the next-largest pure retail drug store chain in the U.S. is Kinney Drugs, with around 100 stores.
The list of large potential suitors for the Walgreens/Rite Aid stores was not long at the get-go, with CVS, Walmart and Kroger being the primary possibilities. Media coverage of the merger continues to zero in on CVS as the likeliest buyer of divested stores. But reports note that CVS is being careful to avoid cannibalization as it sifts through potential Walgreens/Rite Aid stores for purchase — no easy task.
Meanwhile, WBA and Rite Aid have continued to say they expect the transaction to be approved by the end of 2016. WBA recently gave an update on its talks with the FTC to get approval for the $17.2 billion acquisition, which was unveiled last October. While WBA said it’s “actively engaged” in negotiations with the regulator and “is exploring potential divestiture remedies to address certain issues raised in those discussions,” the company also upped its estimate of potential store divestitures to between 500 and 1,000, compared with its earlier forecast of 500 or less.
The fact is, this is no simple competitive dilemma to solve.
“We do believe that the government will need to thoroughly vet the competitive implications of the freestanding drug store market as a result of this pending merger, given the effective creation of a duopoly in the industry,” Wolfe Research analyst Scott Mushkin wrote in a December research note, explaining that the deal would leave CVS and WBA-Rite Aid with more than a 70% share in many markets nationwide.
“It is true that mass merchants and supermarkets offer prescription-filling services and many of the front-end items also carried by drug store chains. However, these competitors have little share [in Rx] when compared to the chain drug retailers, and the business is not core to the operations,” Mushkin explained. “In fact, given that prescription filling services are not core to the operations of supermarkets/mass merchants and that the economics of processing scripts are deteriorating, we believe that some of these retailers could exit the business over the next few years. Walmart and Kroger are likely exceptions.”