By Sharon Terlep and Brent Kendall
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the US print
edition of The Wall Street Journal (June 30, 2017).
Walgreens Boots Alliance Inc. and Rite Aid Corp. scrapped their
$9.4 billion merger agreement, the latest in a series of
high-profile deals to be derailed by antitrust enforcers.
Instead, Walgreens said it would seek to buy half of Rite Aid's
stores for $5.18 billion in cash. Executives said they had crafted
the smaller deal to address regulatory issues, but antitrust
experts said it doesn't eliminate competition concerns.
The aborted deal was a reminder that mergers leading to high
levels of industry concentration may face challenges even as more
business-friendly Republicans take the reins from Democrats in
antitrust enforcement.
The late stages of the review held additional intrigue because
the Federal Trade Commission, which enforces antitrust and
consumer-protection laws, is currently short-handed with just two
commissioners -- one Republican and one Democrat.
Other federal agencies also are operating with vacancies since
the U.S. presidential election, creating a prolonged period of
uncertainty for businesses exploring mergers and seeking other
types of regulatory approval from the government.
Despite a surging stock market and historically low borrowing
rates, the pace of deal making has slowed from the previous two
years. Companies have announced U.S. deals in the first half of the
year worth $581 billion so far, down 17% from the same period last
year and nearly a third below 2015, according to Dealogic. Bankers
say uncertainty about corporate tax rates have weighed on sentiment
at least as much as regulatory concerns.
The slowdown has been particularly acute among megadeals and
with tie-ups in the health-care sector where M&A activity is
down 30% year-to-date, said Richard Peterson of S&P Global
Market Intelligence. Companies may hold off on potentially risky
deals until the FTC is restocked, he said.
"They aren't going to be ready to jump on a transaction
immediately," he said. "They are going to see who the players are.
You can't play your game if you don't know your competition."
The Justice Department, which shares antitrust authority with
the FTC and is reviewing AT&T Inc.'s proposed $85 billion
takeover of Time Warner Inc., is still awaiting Senate confirmation
of President Donald Trump's selection of Makan Delrahim to head its
antitrust division. The nomination has been awaiting a floor vote
for several weeks.
President Trump hasn't nominated a permanent FTC chairman or
moved to fill any of its three open seats. But the vacancies
haven'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.
It also blessed Sherwin-Williams Co.'s acquisition of fellow paint
maker Valspar Corp., a deal valued at more than $11 billion.
Democratic and Republican enforcers sometimes find common ground
on what mergers should be challenged, but the antitrust team in
place at the end of the Obama administration was considered
particularly aggressive. In 2016, for example, the Justice
Department challenged two major health-insurance mergers as well as
Halliburton Co.'s planned acquisition of Baker Hughes Inc.
The FTC's review of the original Walgreens- Rite Aid transaction
stretched 18 months, and the commission didn't back away from
concerns that the deal would have harmed competition, according to
people familiar with the matter.
The commission worried about the merger's impact in regions
where both companies have a strong store presence. It also had been
considering whether the resulting drugstore giant -- which would
have challenged CVS Health Corp. in size -- would have been able to
exert unfair leverage over pharmacy-benefit managers in rate
negotiations for corporate and government drug plans.
Pharmacy-benefit managers, or PBM's, oversee drug-benefit plans for
employers and health insurers.
In an attempt earlier this year to assuage regulators, Walgreens
and Rite Aid agreed to sell up to 1,200 stores, reducing the deal
price to between $6.8 billion and $7.4 billion. Under Thursday's
proposal, Walgreens will buy about 2,200 of Rite Aid's stores.
Previously, Walgreens planned to buy about 3,600 and the rest would
be sold to regional chain Fred's Inc.
The decision to abandon their bigger merger plans indicated the
companies hadn't won over the FTC's acting chairwoman, Republican
Maureen Ohlhausen. Executives at both companies said they decided
to scrap the deal after the FTC indicated to them it would not win
approval.
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 result in two national drugstore
chains that dwarf the next-biggest player. Walgreens has about
8,200 U.S. stores while CVS has about 9,700. 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 antitrust 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, acting head of the FTC's bureau of competition, said
the FTC had "evaluated a number of divestiture proposals put
forward by the parties" and would review any new transaction
proposed.
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 for scuttling the larger
deal.
Shares of Rite Aid tumbled 26% on Thursday while shares of
Walgreens added 1.7% to $78.37. Shares of Fred's fell 23%.
Rite Aid's business has been slumping in recent quarters,
falling further behind Walgreens and CVS. On Thursday, the company
reported that revenue fell 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 upgrade existing
stores, he said.
Asked whether 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 makes sense, we just have to
wait until it plays out."
--Anne Steele contributed to this article.
Write to Sharon Terlep at sharon.terlep@wsj.com and Brent
Kendall at brent.kendall@wsj.com
(END) Dow Jones Newswires
June 30, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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