Morphed Walgreens-Rite Aid Deal Would Alter Pharmacy Landscape

  • United States
  • 06/30/2017
  • Bloomberg Law

By Eleanor Tyler

Walgreens Boots Alliance Inc. and Rite Aid Corp. pulled out of their agreement to merge on June 29, but their new scaled-back asset purchase deal would still transform the competitive landscape between the top pharmacy chains in the U.S.

The parties announced that Walgreens will buy 2,186 stores from Rite Aid, which will leapfrog Walgreens ahead of CVS Health Corp. as the largest drug store chain in the country. The deal comes close to halving the number of outlets Rite Aid will operate, leaving Rite Aid an “independent, multi-regional drugstore chain and pharmacy benefits manager” according to Rite Aid’s announcement.

The new deal must start the antitrust review process afresh, and it’s unclear whether this arrangement will address the Federal Trade Commission’s reservations about the broader merger. The new deal would create two giant nationwide pharmacy chains in Walgreens and CVS and one large regional competitor in Rite Aid that still would lag behind Walmart Stores Inc.

Walgreens, with about 10,000 stores, would be competing with CVS at around 9,100 stores as two dominant pharmacies, according to data from an April 2017 industry report provided to Bloomberg BNA by SK&A, a QuintilesIMS company. Rite Aid would go from around 4,500 stores to about 2,300 stores, a distant fourth in size compared to its two rivals and well behind Walmart, with 4,400 pharmacies. Kroger Co. would rank fifth, with around 1,900 pharmacies, according to SK&A.

Walgreens and Rite Aid said they intend to close this newest deal, subject to regulatory approval, in six months. In addition to the $5.175 billion cash price for the stores changing hands, Rite Aid will get a $325 million fee from Walgreens tied to termination of the prior merger agreement.

Walgreens and Rite Aid abandoned their October 2015 merger deal following “feedback received from the Federal Trade Commission (FTC) that led the company to believe that the parties would not have obtained FTC clearance to consummate the merger,” according to a statement from the companies.

Shuffling the Deck

Rite Aid announced that the 2,186 stores included in the new agreement are “primarily located in the Northeast, Mid-Atlantic, and Southeastern regions of the United States.” Walgreens will also be getting three distribution centers, located in Dayville, Conn., Philadelphia, and Spartanburg, S.C.

Transforming Rite Aid into a regional player, with the same numbers as the bigger grocery store chains in the pharmacy market, will change how the FTC evaluates the new deal. “Rite Aid is very much a regional player now,” Bloomberg Intelligence analyst Jonathan Palmer told Bloomberg BNA.

“The new deal is somewhat of a win for both [Rite Aid] and [Walgreens] if you consider the alternative outcome was likely no deal,” Palmer said. Rite Aid will hold onto “strong franchises on the West Coast and Rust Belt — those two are 70 percent of its stores.” It also gets cash to pay down its debt.

The FTC will need to look at more than just store numbers. Rite Aid has the option to purchase generic drugs that are sourced through a Walgreens affiliate at cost substantially equivalent to Walgreens’ for 10 years as part of the new deal, which will require regulator examination. Still, Palmer sees that aspect as a win for Rite Aid.

“I’m not sure this new deal is slam dunk from an antitrust perspective, but you would think they wouldn’t have announced this without having some substantive talks with the regulators,” Palmer added.

To contact the reporter on this story: Eleanor Tyler in Washington at

To contact the editor responsible for this story: Tiffany Friesen Milone at

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