Rite Aid/Walgreens signing up suitors for divest process, sources say

Provided exclusively by Mergermarket

Walgreens Boots Alliance (NASDAQ:WBA) and Rite Aid (NYSE:RAD) recently signed confidentiality agreements with divestiture suitors, two sources briefed on the matter said.

The major pharmacy chains have been discussing a divestiture plan with the Federal Trade Commission (FTC) to resolve antitrust concerns about their proposed USD 17.2bn merger. Last month, Walgreens said it expects to divest between 500 and 1,000 stores based on communication with the FTC.

Walgreens and Rite Aid are open to divesting all the stores to a single buyer or dividing them up among various acquirers, one of the sources said. It is unclear if the government would prefer one buyer for the divestiture package, a sector advisor said.

Divestiture suitors include CVS Health (NYSE:CVS), Kroger (NYSE:KR), KPH Healthcare Services Kinney Drugs and Fred’s (NASDAQ:FRED), one of the sources said. Some private equity firms are also interested in the assets, but they may not want to acquire the entire collection of stores, the sector advisor said.

CVS, the country’s largest pharmacy chain, would likely only be able to buy some of the stores for antitrust reasons. Kroger, a major grocery store chain based in Cincinnati, does not operate standalone pharmacy stores and an acquisition would represent a strategy change, this news service has previously reported.

Kinney is a privately held pharmacy chain based in the Northeast, in Gouverneur, New York. Fred’s operates dollar stores and pharmacies, primarily in the Southeast. The Memphis-based company explored a buyout with Sycamore Partners and other private equity firms in 2014.

This news service reported in August that the FTC review of the Rite Aid sale was following precedent cases involving pharmacy mergers. The report added that the FTC believes pharmacy benefit managers (PBMs) have a strong hand in negotiations with pharmacies over drug prices.

The large national PBMs that control most of the market are unlikely to be concerned about the deal, two additional sector advisors and an industry attorney said.

Small PBMs that focus on specific states or regions may have concerns if they believe the merger would create a monopoly in their region unless there is an increase in store divestitures, the third sector advisor and attorney said. If they could successfully make this case, the FTC may focus on the small PBMs’ specific markets, the attorney said.

Walgreens declined to comment. Rite Aid, CVS, Kroger, Kinney and Fred’s did not return requests for comment.

by Bhavna Kaul, Dane Hamilton and Esther D’Amico

As seen in the mergermarket newsletter on 07/10/2016

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