Credit Suisse: WBA, Rite Aid deal doable with fewer than 1,000 store divestitures

NEW YORK — The Walgreens Boots Alliance/Rite Aid deal can pass Federal Trade Commission scrutiny with as little as 170 retail store divestitures, according to a proprietary analysis conducted by Credit Suisse, but the company will more likely be required to sell off some 950 stores. The analysis seems in-line with the cap of 1,000 stores Walgreens Boots Alliance's set forth in its Securities and Exchange Commission filing for the acquisition, though independent analysts have suggested the final tally could reach as high as 3,000. 

“FTC risk has been the key investor concern around WBA's proposed acquisition of Rite Aid,” wrote Ed Kelly, Credit Suisse research analyst, in a note published Friday.

The Credit Suisse analysis uses the Rite Aid acquisition of Brooks/Eckerd in 2007 as a relevant baseline. In that deal,the FTC required the company to divest a total of 24 stores in markets where “the merged entity would have had between approximately 50% and 100% of the market for pharmaceutical sales to cash customers.”

Given information from more recent FTC scrutiny of the never-realized Dollar General/Family Dollar and Sysco/U.S. Foods mergers, Credit Suisse feels that threshold is likely to come down to 40% marketshare.

“Any scenario below 40% could put the transaction at risk, but this seems overly aggressive in our view given that WBA and CVS already have shares in excess of this level in many markets,” Kelly wrote.

Whatever the store divestiture requirement might be, as the only other national pureplay drug store operator in the market, CVS Health may be the acquirer of those forced divestitures, according to the Credit Suisse analysis.

“Our analysis indicates that CVS could take down the vast majority of divested stores and still remain under the market share cap set by FTC,” Kelly suggested. “We see this as a near-term positive for CVS following the close of the WBA-RAD deal and estimate that CVS' acquisition of 500 divested stores could add ~$0.08 to 2016 EPS.”