Walgreens, Rite Aid Ditch Long-Suffering Drugstore Merger

On Thursday, Walgreens Boots Alliance (NASDAQ:WBA) announced that it has abandoned efforts to merge with fellow drugstore chain Rite Aid (NYSE:RAD) . Instead, Walgreens will purchase almost half if its rivals stores after the deal passes U.S. regulatory scrutiny from the Federal Trade Commission.

In premarket trading, shares of Walgreens were up about 3.7%, though it has settled a bit, and is currently down 0.60% in late-morning trading. Rite Aid shares were down over 4% in premarket trading, and have now plunged over 26% in light of the news.

Under the terms of the new deal, Walgreens will acquire 2,186 Rite Aid stores and related assets for $5.175 billion. Rite Aid will remain a “multi-regional” drugstore chain, and the store locations being acquired are primarily in the Northeast, Mid-Atlantic, and Southeastern regions of the U.S.

“It will allow us to expand and optimize our retail pharmacy network in key markets in the U.S., including the Northeast, and provide customers and patients with greater access to convenient, affordable care," Walgreens CEO Stefano Pessina said. "We believe this new transaction addresses competitive concerns previously raised with respect to the prior transaction."

For Walgreens, the new transaction will be significantly less expensive. The original deal between the drugstore giant and its smaller competitor came in at about $9.4 billion, though the price range was lowered between $6.8 billion to $7.4 billion in January. The new deal stays “true to our original strategic aim," Pessina said. "Overall I view this deal as being more attractive than the transaction it replaces."

For Rite Aid, the company said it will use the proceeds to pay down debt, and the bonds gained on that news. Bloomberg notes that the company’s “6.75 percent unsecured notes due in 2021 rose as much as 4 cents on the dollar to 102.875,” while the 7.7 percent notes due in 2027 were trading as high as 102.75 Thursday morning in New York.”

"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," Rite Aid CEO John Standley said in a statement.

This new deal also means that pharmacy chain Fred’s Inc. (NASDAQ:FRED) will no longer be a buyer of Rite Aid stores. Last December, the company announced it would purchase 865 stores for $950 million in cash. Shares of Fred’s are down about 19% in late-morning trading. The pharmacy operates stores in 16 Southeastern states

Walgreens said it will begin taking over the Rite Aid stores over a period of about six months, and intends to covert the stores to the Walgreens name brand over time.

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