Walgreens drops Rite Aid takeover, will buy stores instead
NEW YORK -- Walgreens Boots Alliance (WBA) has dropped its takeover pursuit of rival Rite Aid (RAD), following resistance from U.S. regulators and will instead now buy stores, distribution centers and inventory in a new $5.1 billion cash deal.
The proposed merger, first announced in 2015, was initially for about $9.4 billion but was cut to $6.8 billion earlier this year.
Under the new agreement, Walgreens will buy 2,186 stores, three distribution centers and related inventory from Rite Aid. Walgreens will also assume the related real estate leases and certain limited store-related liabilities. Rite Aid will have an option, exercisable through May 2019, to become a member of Walgreen's group purchasing organization.
For scrapping the transaction, Walgreens will pay Rite Aid a $325 million termination fee. It will pay Fred's Pharmacy an additional $25 million following the termination of a related asset deal.
In a statement, Walgreens said Thursday that the stores it purchases from Rite Aid will be converted to the Walgreens brand "over time." The stores included in the agreement are mostly located in the Northeast, Mid-Atlantic and Southeast. The three distribution centers are in Dayville, Connecticut, Philadelphia and Spartanburg, South Carolina.
Neil Saunders, GlobalData's retail managing director, said while dropping the full merger is not ideal, there are positives in the new transaction for both parties. "For Rite Aid, the deal is a good one. The proceeds of Walgreens' payment will allow it to reduce debt and restore its balance sheet to health," he said in a note.
For Walgreens, Saunders sees bigger benefits three years down the line, when the company is able to synergize costs.
Prior to the new deal, Deerfield, Illinois-based Walgreens and Camp Hill, Pennsylvania-based Rite Aid faced a complicated task of easing antitrust concerns to complete the buyout. The companies initially expected to sell no more than 500 stores to appease regulators, but that was eventually pushed to 1,200 stores.
Meanwhile, Walgreens reported a 5.3 percent boost in fiscal third-quarter profit to $1.16 billion, or $1.07 per share. Earnings, adjusted for one-time gains and costs, were $1.33 per share.
Revenue rose 2.1 percent to $30.1 billion.
The results exceeded Wall Street expectations. Analysts surveyed by Zacks Investment Research were looking for earnings of $1.31 per share on $29.68 billion in revenue.
Rite Aid reported a first-quarter adjusted loss of 5 cents per share on revenue of $7.78 billion.
Shares of Rite Aid plunged more than 22 percent in premarket trading, while Fred's stock tumbled nearly 20 percent. Shares of Walgreens were up 6.5 percent.