Walgreens Boots Alliance Inc. clinched regulatory approval for a deal to buy Rite Aid Corp. stores after a last-minute reduction of the number of stores and price, a hard-fought victory after two years of failed attempts.
The drugstore chain gained clearance from the Federal Trade Commission on its fourth try, but it still drew criticism from one of the two commissioners currently on the short-staffed agency, who raised concerns that the deal will reduce competition and lead to rising prices for generic drugs.
Under the new agreement, announced Tuesday, Walgreens will buy 1,932 Rite Aid stores for $4.38 billion, becoming a bigger competitor to CVS Health Corp. That's about 250 fewer stores than under a previous proposal, which totaled $5.18 billion.
Walgreens Chief Executive Officer Stefano Pessina, who had pushed for a transaction since the fall of 2015, said he was surprised by the roadblocks he faced over the lengthy negotiations with regulators.
"We have been a little surprised by the difficulties that we have found and by the length of the process" in getting the deal approved, Pessina said in an interview on Bloomberg Television. "We had to change completely the structure of the deal" when it became clear the Federal Trade Commission was not going to accept an outright acquisition of Rite Aid, the CEO said said.
The modified agreement, while reduced, will still enable Walgreens to edge past CVS to become the largest U.S. pharmacy chain by number of stores.
Rite Aid shares fell 33 cents, or 12.6 percent, to close Tuesday at $2.40, while Walgreens shares fell $1.39, or 1.7 percent to $81.21.
The FTC allowed the deal to go through after declining to open an in-depth investigation of the revised proposal's impact on competition. Commissioner Terrell McSweeny, a Democrat, disagreed with that decision.
"I am concerned that the transaction will leave some communities with fewer pharmacy options and could lead to higher drug prices," McSweeny said in a statement.
The commission's acting chairman, Maureen Ohlhausen, who is a Republican, said in a separate statement the agency over the past 22 months had thoroughly reviewed the competitive issues.
"Rite Aid will remain a robust competitor in the areas where its presence matters," Ohlhausen said. "Rite Aid is likely to achieve comparable or even lower costs for generic drugs for the foreseeable future."
The decision to clear the latest iteration of the deal without an in-depth investigation didn't require a vote by the commissioners.
The store purchases are expected to begin in October and be completed in the spring of 2018, Walgreens said. Most of them are in the northeast and southern U.S., the company said.
With the addition of the Rite Aid stores, Walgreens will have about 10,000 locations in the U.S., compared with 9,700 for CVS. Rite Aid said it will retain about 2,600 stores when the deal is complete.
In the final version of the deal, Walgreens cut the number of stores it will buy in New York state to 272 from 456 to address competitive concerns, New York Attorney General Eric Schneiderman said in a statement. The company will purchase 34 fewer stores in New Jersey and 13 fewer stores in Connecticut, allowing Rite Aid to retain significant share in the New York City metro area, he said. A Walgreens spokesman declined to comment on the locations of the store purchases.
Walgreens initially proposed a takeover of Rite Aid in October 2015 for $9 a share, or $9.4 billion. That deal ran into roadblocks at the trade commission, and in January Walgreens and Rite Aid recut the deal in an attempt to resolve the agency's concerns that the combination would hurt competition.
A revamped merger plan called for selling up to 1,200 Rite Aid locations to another buyer to satisfy the trade commission and was worth at least $2 billion less to Rite Aid shareholders. That approach, which could have cost Walgreens as much as $7.37 billion, again failed to win over the regulator, and Walgreens terminated the plan in June.
The company said it instead would pay $5.18 billion to acquire 2,186 stores, leaving a slimmed-down Rite Aid as a stand-alone company. But that still wasn't enough to satisfy the FTC. The final version of the deal that was announced Tuesday has about 12 percent fewer stores -- and a lower price.
Business on 09/20/2017