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, the latest in a series of high-profile deals to be derailed by antitrust enforcers.

Instead, Walgreens said Thursday it would seek to buy half of Rite Aid's stores for $5.18 billion in cash. Executives said they had crafted the new smaller deal to address regulatory issues, but antitrust experts said there could still be competition concerns.

During a review that stretched 18 months, Federal Trade Commission staff didn't back away from concerns that the original transaction would have harmed competition, according to people familiar with the matter.

Among the 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.

Under the new deal, Walgreens will buy about 2,200 of Rite Aid's 4,500 stores. Previously, Rite Aid planned to sell about 3,600 stores to Walgreens and up to 1,200 to regional chain Fred's Inc.

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.

Seth Bloom, an antitrust lawyer in Washington, said the new deal still raises questions that would require FTC scrutiny, including on the issue of Walgreens' growing national muscle.

"Just because it's half the number of stores as the previous deal doesn't necessarily settle it," Mr. Bloom said. "It could make the review easier, but it's not a slam dunk yet."

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 had "thoroughly investigated" the original deal and "evaluated a number of divestiture proposals put forward by the parties." His statement declined to offer further details of the FTC review.

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. Walgreens will pay Rite Aid a $325 million termination fee.

Shares of Rite Aid tumbled 25% on Thursday afternoon while shares of Walgreens added 1.3% to $79.04. Shares of Fred's fell 19%.

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, a tie-up of Office Depot Inc. and Staples Inc. was blocked after a federal judge sided with the FTC that it could lead to higher prices. On Wednesday, Staples agreed to sell itself to a private-equity firm for $6.9 billion.

Both Rite Aid and Walgreens -- which has about 8,200 stores in the U.S. -- have a major presence in California, New York and Massachusetts, while in other states including Florida, Texas and Illinois, there isn't any overlap. CVS has about 9,700 stores.

"This still poses really serious antitrust issues," said David Balto, an antitrust lawyer in Washington who represents parties that objected to the merger. "It is crystal clear that the FTC has decided it's essential to have three players and, by acquiring so many Rite Aid stores, it devastates the future of Rite Aid."

Rite Aid's business has been slumping in recent quarters, falling further behind Walgreens and CVS. On Thursday, the company reported that revenue declined 5% to $7.8 billion in the quarter ended June 3 and it posted a loss of $75 million.

Rite Aid CEO John Standley said the remaining stores are more profitable, and the smaller size will leave the company less exposed to reductions in drug reimbursement rates. The company plans to use deal proceeds to pay down debt and the resulting lower interest costs will help free up cash to upgrade existing stores, he said.

Asked on a call Thursday whether the he expects the FTC to approve the new deal, Mr. Standley said: "There's a chance that it won't go, that's the reality of the process. We believe it make sense, we just have to wait until it plays out."

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 12:35 ET (16:35 GMT)

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