Walgreens to Buy Rite Aid for $9.4 Billion
As companies throughout the universe of the health care industry accelerate the pace of consolidation, two of the country’s biggest drugstore chains have agreed to combine to create a new giant.
Walgreens Boots Alliance said on Tuesday that it would buy Rite Aid for more than $9.4 billion in cash, significantly bolstering its influence with drug makers and pharmacy benefit managers.
But the combination may draw a skeptical eye from government regulators concerned about the retail pharmacy market effectively shrinking to only a few big chains.
The deal is the latest taking place in the sweeping changes under the Affordable Care Act, which has inspired drug makers, insurers and others to combine.
For pharmacies, a rise in insured Americans has increased prescription demand, helping increase the total revenue of the nation’s retail, mail and specialty pharmacies 7 percent last year from 2013.
At the same time, companies have also been pressured to keep costs down.
Walgreens Boots Alliance, itself forged in the combination of Walgreen Company and the European chain Alliance Boots, has made no secret of its desire to expand through acquisitions.
Led by Stefano Pessina, a trained nuclear engineer and former academic who sold Alliance Boots to its American counterpart, the company has strongly hinted that Rite Aid would be a target.
“Today’s announcement is another step in Walgreens Boots Alliance’s global development and continues our profitable growth strategy,” Mr. Pessina said in a statement.
Even before the Alliance Boots deal, Walgreens has kept busy with mergers, acquiring Duane Reade, USA Drugs and Kerr Drug to grow to more than 8,200 stores and revenue of $76 billion last year.
Under the terms of the deal announced on Tuesday, Rite Aid shareholders will receive $9 a share — a premium of 48 percent to its closing stock price on Monday. Including the assumption of net debt, the deal gives Rite Aid a total enterprise value of $17.2 billion.
Buying Rite Aid would give Walgreens an additional 4,600 stores in 31 states, adding to its roughly 8,200 locations across the country, Puerto Rico and the Virgin Islands.
The biggest drugstore chain by market cap, CVS Health, has also grown, acquiring Long’s Drug, Medicine Chest and Navarro Discount Pharmacy, and now runs more than 7,800 stores.
With years of steep losses, Rite Aid, which itself acquired the Brooks and Eckerd pharmacy chains in 2007, has fallen to a distant third.
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“The pharmacy consolidation endgame has begun,” said Adam J. Fein, president of Pembroke Consulting, a firm based in Philadelphia that specializes in the pharmaceutical industry. “Rite Aid was one of the last remaining pharmacy assets available for purchase,” he said.
“Even with its debt, Rite Aid could have survived into the future. But this combination will give the new business a lot more scale,” he said. “The combined entity will have a lot more power against pharmacy benefit managers and other payers. They will be able to negotiate higher reimbursements for prescriptions.”
Rite Aid will be a wholly owned subsidiary of Walgreens operating under its own brand name when the deal is completed.
Yet the transaction, which is expected to close by the end of next year, could draw significant antitrust scrutiny.
Regulators will study specific geographical areas where Walgreens and Rite Aid compete, according to Jeffrey S. Spigel, the head of the antitrust practice at the law firm King Spalding. The combined new business will most likely need to divest itself of overlapping locations.
The Federal Trade Commission is also likely to scrutinize the changing ways in which consumers buy pharmacy items and prescriptions, and assess whether there is ample competition for these products, Mr. Spigel said.
“I expect that the companies will argue that the competition is now broader than just the Rite Aids, Walgreens and CVSs of the world,” he said. “They’ll argue that you need to take into account competition from pharmacies that are in grocery stores, that are in Walmarts, that sell through mail order.”
Shares of Rite Aid jumped after The Wall Street Journal reported that the companies were in talks, and ended the day up nearly 43 percent, at $8.67.
Walgreens expects to finance the transaction through a combination of existing cash, assumption of existing Rite Aid debt and issuance of new debt.
Citigroup advised Rite Aid. Skadden, Arps, Slate, Meagher Flom was legal counsel on transaction legal matters, and Jones Day was its legal counsel on antitrust regulatory matters.
UBS advised Walgreens and will be the sole arranger on the bridge financing.
Simpson Thacher Bartlett acted as legal counsel to Walgreens on transaction legal matters, and Weil, Gotshal Manges acted as its legal counsel on antitrust regulatory matters.
A version of this article appears in print on October 28, 2015, on Page B1 of the New York edition with the headline: Acquisitive Walgreens Is Buying Rite Aid . Order Reprints | Today’s Paper | Subscribe
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