Walgreens – Rite Aid Deal Faces Potential Road Blocks

By Cody Laska,  
Money & Investing Writer

The $17.2 billion deal between Walgreens Boots Alliance (NASDAQ: WBA) and Rite Aid (NYSE: RAD) is facing a major road block that sees completion of the merger pushed back to 2017.

Both the second and third largest pharmaceutical companies could potentially be facing antitrust scrutiny, which investors were weary of when the deal was first announced in 2015. Third party Kroger (NYSE: KR) is balking at the idea of purchasing 650 Rite Aid and Walgreen’s store fronts; as was the original plan to avoid the FTC terminating the deal.
In a report from Reuters, the FTC reached out directly to Kroger informing them that they would not be permitted to purchase and then close Rite Aid stores that were in close competitive or geographical range to their existing Kroger locations.

This is viewed as the most likely reason for Kroger getting cold feet from purchasing the store fronts and thus putting the deal into jeopardy; as Walgreens was advised to sell between 500 and 1000 stores to ensure that the deal would go through.

As of the most recent market close (10/21/16October 21, 2016) Rite aid is trading at $7.04.
This is 21 percent less than the agreed upon sales price from 2015 of $9.00. Private equity firms are quickly losing interest in the deal as they begin to doubt it more.

Kroger has seen a slight rise in price over the past few days; likely a result of investors approving their choice to back away from the stores and maintain their current locations.
In response to falling share prices and Kroger’s recent back steps, Walgreens made the following statement: “Walgreens Boots Alliance remains actively engaged with the Federal Trade Commission regarding its review of the pending acquisitions and continues to expect that the most likely outcome will be that the parties will be required to divest between 500 and 1,000 stores…pending FTC approval, by the end of calendar year 2016, expects the acquisition of Rite Aid will close in early calendar 2017.”

Walgreens CEO Stefano Pessina remains optimistic about  the deal quoted during the company’s fourth quarter earnings call “We are as confident as we were before about the deal. We have just delayed the completion.” Both Walgreens and Rite Aid have agreed to extend the merger window from late October 2016 to late January 2017.

If the deal were to fall through, it can be anticipated that the number one in the industry CVS will continue to see an upward rise in their stock price; benefiting significantly from the new Medicare prescriptions offered by one of their subsidiaries SilverScript.

This merger is seen as an attempt to jumpstart Walgreen’s recent lackluster earnings; which have risen only a mere .4 percent. What transpires over the next three months may greatly influence how the market of convenient stores will look in the future.

A version of this article appeared in the Tuesday, October 25th print edition.

Contact Cody at
cody.laska@student.shu.edu

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