CAMP HILL, PA—Rite Aid Corporation announced on June 29 that it will sell 2,186 stores to larger competitor Walgreens Boots Alliance, Inc. (WBA), for $5.175 billion in cash in a wide-ranging deal.

Walgreens said it expects the initial closing of the transaction within six months, after which it will begin buying the Rite Aid stores and switch them to Walgreens stores.

The drugstore chain also said it would terminate the merger agreement announced in 2015, which failed to win antitrust approval. 

“The decision to terminate the merger agreement follows feedback received from the Federal Trade Commission (FTC) that led the company to believe that the parties would not have obtained FTC clearance to consummate the merger,” reads a media release.

Due to the termination, WBA has agreed to pay Rite Aid a termination fee of $325 million in cash. Tennessee-based-WBA also terminated its agreement with Fred’s, Inc., a smaller pharmacy chain, to sell to sell it 865 Rite Aid stores for $950 million in cash.

“While the acquisition of additional stores was an opportunity for growth, we always viewed it as a potential outcome that would accelerate our transformation, not define it,” said Fred’s Chief Executive Officer Michael K. Bloom, adding that the outcome was disappointing.  

The 2,186 Rite Aid outposts, which will eventually be converted to Walgreens, are primarily located in the Northeast, Mid-Atlantic and Southeastern regions of the United States, said Rite Aid.

Neither chain has released information on which Rite Aid stores are covered by the asset sale.

“The list of stores will be shared at a later date,” Ashley Flower, Rite Aid Corporation, Sr. Manager-Public Relations, told New Brunswick Today. 

As far as the Rite Aid store on George Street in downtown New Brunswick, staffers have said repeatedly it’s not going to morph into a Walgreens.

And while a pharmacist there said he would have surely received a letter informing him of any change, he added that he could only speak for the Hub City location.

Rite Aid Corporation said it will provide certain transition services to WBA for as many as many as three years after the deal closes.

Under the agreement, Rite Aid has the option to purchase generic drugs procured through an affiliate of WBA at a roughly equal cost to that of Walgreens for the next decade. 

“While we believe that pursuing the merger with WBA was the right thing to do for our investors and customers, this new agreement provides a clear path forward and positions Rite Aid as a strong, independent, multi-regional drugstore chain and pharmacy benefits manager with a compelling footprint in key markets,” said Rite Aid’s Chief Executive Officer John Standley.

“The transaction offers clear solutions to assist us in addressing our pharmacy margin challenges and allows us to significantly reduce debt, resulting in a strong balance sheet and improved financial flexibility moving forward.”

After the deal, Rite Aid will continue to operate EnvisionRx, its pharmacy benefit manager, RediClinic, and Health Dialog, and leverage the synergies created by these subsidiaries to improve service in communities such as the Hub City.

“The transaction will transform Rite Aid into smaller but stronger company that will have less exposure to the pharmacy reimbursement rate pressures that have had such a negative impact on our business,” Standley stated on a recent earnings call.

“While the deal is not the deal of choice for either Walgreens or Rite Aid it is a good compromise that brings benefits to both parties. Ironically, it is also one that means Rite Aid will effectively become a part of Walgreens network, albeit with a degree of operational and managerial independence,” said GlobalData Retail analyst Neil Saunders, in a note. 

Saunders questions how Rite Aid will survive as a smaller entity.

“After the deal, the group will have 2,337 stores – around half the number it has now,” he said.

“This will be punishing on economies of scale, especially for a company that is already struggling to turn a profit even before interest payments are taken into account. The answer lies in the agreement with Walgreens, which will allow Rite Aid to become a member of Walgreens Boots Alliance’s group purchasing organization. In our view, this will be highly beneficial and will allow Rite Aid to improve pharmacy margins drastically,” added Saunders.

Standley, the CEO, acknowledged the entire Rite Aid crew.

“We have an outstanding team of associates and, with their continued support, we will work together to deliver a great customer experience, improve our business and deliver value to all of our stakeholders.”

The deal is expected to close within six months, and has been approved by the Boards of Directors of Rite Aid and WBA.

At that time, WBA will start buying the Rite Aid outposts and convert them to Walgreens. But the transaction is subject to antitrust clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and other customary closing conditions.

Rite Aid expects to use most of the net proceeds from the transaction to pay down debt and said that the federal tax gain on the sale of the assets should be largely offset by its net operating loss carryforwards, resulting in a minimal cash tax payment on the deal.

“We believe this new transaction addresses competitive concerns previously raised with respect to the prior transaction,” said Walgreens Chief Executive Officer Stefano Pessina in a statement.

“When we first began discussion with Rite Aid, it was with a vision of increasing our network and our population coverage… [But] potentially greater benefit could be gained by bringing the two entire companies together through an acquisition,” said Pessina on an earnings call.

“However, given the changes in the market that, during the longer-than-expected Federal Trade commission review process and the ongoing uncertainty about the potential outcome, we have decided after detailed discussion with Rite Aid not to continue to review the acquisition of the company,” continued Pessina.

Pessina noted that the purchase also included “warehouses and inventory to support [the] stores,” though the deal was “smaller than the original.”

Three distribution centers also included in the deal are located in Philadelphia, Dayville, Connecticut, and Spartanburg, South Carolina.

“Overall, I view this deal as being more attractive than the transaction it replaces, recognizing the adjustments and compromises that we have had to make since the original deal was announced in what continues to be a challenging market for pharmacy,” added Pessina.  

Business Reporter at New Brunswick Today | dschatz@nb.today

Dave is an award-winning business reporter who has authored over 200 articles for New Brunswick Today.

Dave is an award-winning business reporter who has authored over 200 articles for New Brunswick Today.