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Finance

Finance

Walgreens to revise proposal to buy over 2,000 Rite Aid stores

Walgreens
Walgreens

In yet another effort to appease the Federal Trade Commission (FTC), U.S. pharmacy chain Walgreens will likely revise its June proposal to acquire 2,186 individual Rite Aid stores for $5.18 billion, sources told Bloomberg Monday.

Walgreens’ announcement could come early this week, the sources said.

The two chains have been pursuing a deal for almost two years, but the three proposals they have submitted thus far have met resistance from the FTC. In October 2015, Walgreens proposed an outright takeover of Rite-Aid. Under that deal, the former company would have purchased the latter for $9 per share—that amounts to a total of $9.4 billion.

Walgreens offer represented a 48 percent premium on Rite Aid’s closing price on October 26, the day before the proposal was announced.

The FTC reportedly worried that Walgreens’ purchase of Rite Aid would compromise competition.

A report by the Drug Channels Institute indicates that at the close of 2016, Walgreens controlled 13.8 percent of the U.S. prescription market, in terms of revenue. Under five percent of that market belonged to Rite Aid. The takeover would have given the combined company 18.4 percent of the market.

CVS, the nation’s largest pharmacy chain in terms of revenue, holds 23.4 percent of the prescription market.

This January, in response to the FTC’s concerns, Walgreens revised the price per share to between $6.50 and $7—putting the total value of the purchase between $6.84 billion and $7.37 billion—and pledged to sell as many as 1,200 of its newly acquired Rite Aid stores (about a quarter of the 4,600 or so Rite Aid locations Walgreens would have acquired) to Fred’s, a regional pharmacy chain.

In June, amidst continued skepticism from the FTC, Walgreens took a different tack. Rather than taking over Rite Aid, Walgreens proposed buying 2,186 individual Rite Aid stores—roughly 48 percent of the total number of Rite Aids—for a total of $5.18 billion, leaving Rite Aid to operate as a stand-alone entity.

Because it abandoned the original takeover plan, Walgreens was obligated to pay Rite Aid a termination fee of $325 million in addition to the purchase price.

Rite Aid stock plunged about 30 percent on news of the abandoned takeover, Fortune notes.

The Fortune piece casts doubt on whether the FTC was set to block the merger, citing a CTFN report that in turn cites antitrust lawyers and a former DOJ official as saying in late June that the FTC was “more likely than not” to approve the deal.

Prior to the companies’ withdrawal of the proposal, the FTC had taken no action to block the agreement. Following the withdrawal, Fortune says, the FTC released a statement calling the companies’ action “voluntary” and saying it came before the companies “would have been free to close their transaction absent Commission action.”

But, Walgreens Chief Executive Officer Stefano Pessina implies that he amended the deal in the face of regulatory pressure

“This deal [the one announced in June] is much simpler,” said per Bloomberg, of the June proposal. “It is an asset deal so it is less controversial.”

The FTC has allegedly frowned upon that deal as well, so Walgreens is set to amend its proposal for the fourth time. Sources told Bloomberg the “number of stores involved in the deal would not change dramatically” (Bloomberg’s paraphrasing).

The deadline by which the FTC was required to complete its review of the June proposal is nearing, Bloomberg notes. When that deadline arrives, the agency will either approve the deal or request additional information.

If Walgreens submits a revised plan prior to the deadline, though, the FTC would have 30 more days to consider that new proposal, and investigation of the previous one would end.

Rite Aid shares jumped 3.8 percent to a two-and-a-half-year high Monday on news that Walgreens was considering revising the deal. Walgreens surged in early trading but quickly modulated. At the market’s close, the company’s shares had risen marginally (0.12 percent).

Featured image via Wikimedia Commons


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