RAD Rite Aid Corp

By Ezequiel Minaya 

Investors awaiting the long-delayed tie-up between drugstore chains Walgreens Boots Alliance Inc. and Rite Aid Corp. are growing increasingly uneasy that the deal, heavily scrutinized by regulators, could fall apart.

Walgreens, Rite Aid and Fred's Inc. -- a Memphis chain that had agreed to buy 865 stores that were being divested to satisfy the government -- are set to report earnings this week, potentially shedding some light on the status of the merger.

Federal regulators are concerned the deal, which would marry the second- and third-largest pharmacy chains by sales, could stymie competition. Among the antitrust concerns, the resulting drugstore giant -- which would challenge CVS Health Corp. -- would be able to bully pharmacy-benefit managers steering corporate and government drug plans.

The companies have taken numerous steps to try to appease the government since they struck a $9.4 billion deal in October of 2015, including agreeing to unload hundreds of stores. Divestitures are often required in large deals to assuage concerns over market power and consolidation within specific markets and industries.

In January, the companies said they would cut the amount Walgreens would pay to between $6.8 billion and $7.4 billion, depending on how many stores needed to be sold, and added that they would look to divest even more. The companies set a new deadline of July 31 to close the deal.

On news of the January announcement, Rite Aid shares dropped 19%, and they have fallen 24% further since then. "The market is saying [the merger is] not going to go through," said John Ransom, managing director of St. Petersburg, Fla.-based brokerage firm Raymond James, which makes markets in shares of both Walgreens and Rite Aid. Shares of Fred's have declined 7.2% since the announcement, while Walgreen's shares have risen 1.9%.

"They need to figure out what stores need to go, and what I heard is that the government wanted the stores to remain open as retail stores," said Mr. Ransom. "Walgreens initially thought it was going to be just 500, and it turned out to be much more." Walgreens and Rite Aid have said they may sell a total of up to 1,200 of Rite Aid's roughly 4,600 stores.

Walgreens said its talks with the government are continuing. When asked whether Rite Aid had an update on the transaction or would provide one along with its earnings report, a spokeswoman referred back to the company's news release from January. The Federal Trade Commission and Fred's didn't respond to requests for comment.

The merger's completion is paramount for Rite Aid shareholders, who have seen the shine fade off their stock after a sharp jump when the deal was announced. Pending mergers tend to eat up much of company managers' time, and Rite Aid hasn't spoken to analysts on an earnings conference call in more than a year with the deal in limbo.

Walgreens, meanwhile, would be able to significantly expand its reach with a network of roughly 13,000 drugstores. Rival CVS has about 7,800 by comparison. Walgreens also could likely reap considerable savings from the deal.

Fred's owns about 650 stores and had a market capitalization of roughly $400 million before it agreed to borrow $1.65 billion to fund the purchase of hundreds of Rite Aid stores. The chain has posted just about all of its assets, down to its furnishings, to back the financing.

Write to Ezequiel Minaya at ezequiel.minaya@wsj.com

(END) Dow Jones Newswires

April 03, 2017 02:47 ET (06:47 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.