Why Fred’s Is A Key Player In The Walgreens – Rite Aid Deal

Walgreens Boots Alliance (NASDAQ:WBA) is still awaiting regulatory approval for its proposed acquisition of Rite Aid (NYSE:RAD). The merger couldn’t be completed by January 27, 2017, the earlier proposed deadline, so the merger deadline was extended to July 31, 2017, albeit with revised conditions with an aim to meet FTC requirements. Per the revised terms, Walgreens will pay $6.50 to $7 per share, compared to the $9 it proposed earlier. Under the new proposal, Walgreens will divest between 1,000 and 1,200 stores, as the earlier plan of divesting 865 stores and certain assets (to Fred’s) for $950 million attracted regulatory scrutiny. The final price per share of the deal will depend on the number of stores Walgreens divests.

Per recent reports, Walgreens is actively pursuing the deal and is planning a host of measures to expedite the process. The company is planning to declare “certified compliance” for its pending merger, which would ensure that regulatory authorities decide on the merger within 30 days from the date of issuance.

The company is in talks with Fred’s for a sale of an increased number of stores and assets, which should meet regulatory requirements. The addition of 1,000 to 1,200 new stores would significantly boost Fred’s presence in the country and help it establish itself as a national chain competitive with CVS and Walgreens.

What Would Fred’s Gain?

Per its third quarter SEC filing, Fred’s operates 648 discount general merchandise stores and 3 specialty pharmacy locations in the Southeastern U.S. The addition of at least 1,000 stores would significantly increase Fred’s store count, giving Fred’s a significant presence across the country, especially on the west coast, and make it the third largest pharmacy retailer in the country. In order to prepare itself for the challenges it will face in integrating more than 1,000 new stores, Fred’s is undertaking a slew of measures including hiring experienced professionals from the retail sector. ^[1]

Going forward, Fred’s expects healthcare to drive growth for the company. If Fred’s manages to get the divested Rite Aid stores under its umbrella, it can expect to benefit from the high prescription business from existing stores since it would be able to use the Rite Aid brand name for an extended period. ^[2]. At the same time, additional pharmacy revenues could help the company stem its decline in comparable sales.

The delay in completion of the merger has severely impacted Rite Aid’s stock price, which is currently trading almost 40% lower than the levels seen at the beginning of 2017. Moreover, Walgreens has stated that it doesn’t have a Plan B in place in case the transaction fails to go through. Accordingly, a swift conclusion to the ongoing negotiations is likely to benefit all parties involved.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Fred Bolsters Board As Walgreens, Rite Aid Nears FTC Nod, The Street, March 17 2017 [↩]
2. Walgreens Said Poised To Sell More Assets To Win Rite Aid Nod, Bloomberg, March 14 2017 [↩]