RAD Rite Aid Corp

By Anne Steele, Sharon Terlep and Brent Kendall 

Walgreens Boots Alliance Inc. and Rite Aid Corp. nixed their $9.4 billion merger agreement, which had been heavily scrutinized by antitrust regulators, and reached a new deal in which Walgreens will buy half of Rite Aid's stores for $5.18 billion in cash.

The companies said the decision to spike the previous deal comes after it got feedback from the Federal Trade Commission that the merger likely wouldn't have gotten government approval.

FTC staff had not backed away from concerns that the deal would have harmed competition, and the companies were facing the real prospect of a legal challenge had they not terminated the deal, according to people familiar with the matter.

Among the antitrust concerns was that the resulting drugstore giant -- which would have challenged CVS Health Corp. -- would have been able to bully pharmacy-benefit managers steering corporate and government drug plans. The deal was announced in October 2015.

The new transaction terminates the previous deal, as well as Rite Aid's agreement to sell 865 of its stores to regional chain Fred's Inc. The new deal represents about half of the 4,523 stores Rite Aid operated as of the end of the first quarter.

On a conference call Thursday, Walgreens Chief Executive Stefano Pessina said the smaller transaction addresses 'all substantive' FTC concerns. The company will be adding stores in regions where it currently lacks a large presence, including the Northeast and MidAtlantic. Asked whether that could be a concern for the FTC, Walgreens General Counsel Marco Pagni said, "you should assume that we have taken account of specific feedback in formulating the plan."

The transaction would still leave two national drugstore chains that dwarf a far smaller No. 3 player. The firms, however, also compete with pharmacies at grocery chains and discounters like Wal-Mart Stores Inc.

Tad Lipsky, the acting head of the FTC's bureau of competition, said the FTC would review any new transaction proposed by the parties.

Mr. Lipsky said commission staff "thoroughly investigated the potential impact that the proposed Walgreens/Rite Aid merger may have had on competition and evaluated a number of divestiture proposals put forward by the parties." His statement declined to offer further details of the FTC review.

Walgreens said it expects $400 million in cost savings from the new deal within three to four years of closing, and said the transaction will add to its adjusted earnings in the first year.

Walgreens will pay Rite Aid a $325 million termination fee. Rite Aid said it would use the cash to cut down its debt and shore up its balance sheet.

Shares of Rite Aid tumbled 22% in early trading while shares of Walgreens added 3.8% to $80.02.

The five-member FTC is currently short-handed, with only two commissioners, one Republican and one Democrat. But that hasn't stopped the commission from taking action in some cases, including earlier this month when it sued to block the proposed merger of fantasy sports companies DraftKings Inc. and FanDuel Inc.

Walgreens-Rite Aid is the latest in a string of high-profile deals to fall apart at the hands of regulators. Earlier this year, two pairs of health insurers -- Aetna Inc. and Humana Inc. and Anthem Inc. and Cigna Corp. -- said they would terminate their mergers, worth a combined $82 billion, after courts sided with regulators and found they violated antitrust law.

Last year, Pfizer Inc. abandoned its $150 billion takeover of Allergan PLC after the Obama administration took aim at the deal, which would have moved the U.S.'s biggest drug company to Ireland and lowered its taxes. Halliburton Co. and Baker Hughes Inc. also called off merger plans after they encountered regulatory opposition on several continents. And a tie-up of Office Depot Inc. and Staples Inc. was blocked in 2016 by a federal judge on the grounds that it could lead to higher prices.

Both Rite Aid and Walgreens -- which has about 8,200 stores -- have a major presence in California, New York and Massachusetts, while in other states, including Florida, Texas and Illinois, there isn't any overlap.

In an attempt earlier this year to assuage regulators, the two companies had agreed to sell as many as 1,200 of Rite Aid's 4,600 locations.

The FTC has increased its scrutiny of buyers of divested assets since a high-profile settlement in 2015 quickly went sour. In that matter, the FTC allowed the acquisition of supermarket operator Safeway Inc. by the owner of Albertsons after the companies agreed to sell 168 stores, mostly to a small grocery chain, Haggen Holdings LLC.

Haggen struggled with the expansion and filed for bankruptcy protection in a matter of months. Albertsons eventually bought back some of the stores the government had required it to sell.

Fred's operates 601 pharmacy and retail stores mainly in the southeastern U.S.

In a statement, Fred's called the termination a "disappointing outcome," but that it has no impact on the company's transformation strategy. Shares of Fred's, which said the acquisition of 865 of Rite Aid's stores would "accelerate our transformation, not define it," dropped 23%; the stock had jumped sharply when the deal to buy stores was announced.

Write to Anne Steele at Anne.Steele@wsj.com, Sharon Terlep at sharon.terlep@wsj.com and Brent Kendall at brent.kendall@wsj.com

(END) Dow Jones Newswires

June 29, 2017 10:17 ET (14:17 GMT)

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