A Major Deal Falls into Trouble
The $17.0-billion deal to merge Walgreens and Rite Aid Corporation (NYSE:RAD) was put into jeopardy when supermarket giant Kroger Co (NYSE:KR) backed out of buying several hundred Rite Aid branches. Those branches need to be sold to overcome antitrust objections, meaning the merger may not happen now.
Regulators look askance at corporate buyouts that lead to outsize market influence, which is what could happen if two of the biggest pharmacy owners join forces. To assuage those fears, Rite Aid and Walgreens embedded a provision in the contract to sell hundreds of outlets.
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The idea is to limit their power to a level that would satisfy the competition mandate of the antitrust authorities. Kroger was the partner company meant to acquire those outlets, but it backed out at the last moment. That led to Rite Aid’s share price falling to $6.70. (Source: “Walgreens posts strong 4Q earns, but delays Rite Aid deal,” Associated Press, October 20, 2016.)
Considering that Walgreens is offering $9.00 per share for Rite Aid, the investor reaction was clearly bearish. However, the share price bounced up to $7.07 the following day as Walgreens postponed the deadline on the giant merger.
They now have until January 27 to complete the $9.45-billion merger.
“We remain actively engaged with the FTC on its review,” said Alex Gourlay, co-chief operating officer of Walgreens, during its Thursday earnings call. “We plan to execute agreements to divest the stores to potential buyers by the end of the year.”
Despite Gourlay’s optimism, analysts are questioning how Kroger’s absence could affect the dynamics of the deal, and its potential impact on pricing. They suggest that there are still obstacles ahead. (Source: “Walgreens’ Rite Aid Acquisition Close Delayed by FTC Investigation,” TheStreet, October 20, 2016.)
“Should Walgreens find potential store buyers for what the FTC may deem to be an insufficient divestiture package, it is believed that the FTC may require Walgreens to divest more Rite Aid stores,” wrote Deutsche Bank Analyst George Hill in a note. “Alternatively, if Walgreens is unable to attract buyers, the FTC could block the deal through a lawsuit, pushing back the merger agreement’s end-date.”
