Walgreens, Rite Aid Scrap Merger Plans

Walgreens and Rite Aid have terminated their merger agreement. The decision to terminate the merger agreement follows feedback on the merger’s prospects received from the Federal Trade Commission, Rite Aid said. Rite Aid added that the potential FTC objection led the company to believe that the parties would not have obtained the commission’s clearance to complete the merger.

Rite Aid has also entered into an asset purchase agreement with Walgreens Boots Alliance, whereby Walgreens will acquire 2,186 of its stores, related distribution assets and inventory for an all-cash purchase price of $5.18 billion, on a cash-free, debt-free basis.

The 2,186 stores included in the agreement are primarily located in the Northeast, Mid-Atlantic and Southeastern regions of the U.S. The three distribution centers included in the agreement operate in Dayville, CT, Philadelphia and Spartanburg, SC. Under the terms of the agreement, Rite Aid will provide certain transition services to Walgreens Boots for up to three years after the transaction closing. The Rite Aid and Walgreens boards of directors have approved the present transaction, which it expects to close in six months.

“This new transaction extends our growth strategy and offers additional operational and financial benefits,” said Stefano Pessina, Walgreens Boots Alliance executive vice chairman and CEO. “We believe this new transaction addresses competitive concerns previously raised with respect to the prior transaction and will streamline and simplify the transition for customers, team members and other stakeholders.”

In light of the termination of the merger agreement, a divestiture agreement with Fred’s that anticipated an FTC consent to the Walgreens merger, also was terminated. Fred’s had signed a purchase agreement with Walgreens and Rite Aid to purchase 865 stores and certain other assets.

Michael Bloom, Fred’s CEO, stated, “While the acquisition of additional stores was an opportunity for growth, we always viewed it as a potential outcome that would accelerate our transformation, not define it. This is a disappointing outcome; however, the termination of the transaction has no impact on the company’s transformation strategy or our ability to execute. We are as confident as ever that we have a strong team and the right strategy in place to drive long-term growth and profitability.”

In connection with the termination of the merger, Walgreens has agreed to pay Rite Aid a termination fee in the amount of $325 million in cash.

“While we believe that pursuing the merger with Walgreens Boots 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 drug store chain and pharmacy benefits manager with a compelling footprint in key markets,” said John Standley, Rite Aid chairman and CEO. “The transaction offers clear solutions to assist us in addressing our pharmacy margin challenges and allows us to significantly reduce debt, resulting in a strong balance sheet and improved financial flexibility moving forward.”