Walgreens, Rite Aid scrap merger, outline new deal

DEERFIELD, Ill. — Walgreens Boots Alliance Thursday morning announced a new Rite Aid deal, effectively scuttling its proposal to acquire the Camp Hill, Pa.-based chain and surrendering the $325 million termination fee with respect to the old merger agreement. The divestiture agreement with Fred's Pharmacy is terminated.



“This new transaction extends our growth strategy and offers additional operational and financial benefits,” Stefano Pessina, executive vice chairman and CEO of Walgreens Boots Alliance, said. “It will allow us to expand and optimize our retail pharmacy network in key markets in the U.S., including the Northeast, and provide customers and patients with greater access to convenient, affordable care. We believe this new transaction addresses competitive concerns previously raised with respect to the prior transaction and will streamline and simplify the transition for customers, team members and other stakeholders.”



Under the new agreement, Walgreens Boots Alliance will acquire 2,186 of Rite Aid's 4,523 locations for a consideration of $5.175 billion in cash, the assumption by Walgreens Boots Alliance of the related real estate leases and the grant of an option to Rite Aid, exercisable through May 2019 and subject to certain conditions, to become a member of Walgreens Boots Alliance’s group purchasing organization, Walgreens Boots Alliance Development.

"While we believe that pursuing the merger with WBA was the right thing to do for our investors and customers, this new agreement provides a clear path forward and positions Rite Aid as a strong, independent, multi-regional drugstore chain and pharmacy benefits manager with a compelling footprint in key markets," said John Standley, chairman and CEO of Rite Aid. "The transaction offers clear solutions to assist us in addressing our pharmacy margin challenges and allows us to significantly reduce debt, resulting in a strong balance sheet and improved financial flexibility moving forward."      



The 2,186 stores included in the agreement are primarily located in the Northeast, Mid-Atlantic and Southeastern regions of the United States. The three distribution centers included in the agreement are located in Dayville, Conn., Philadelphia and Spartanburg, S.C. Under the terms of the agreement, Rite Aid will provide certain transition services to WBA for up to three years after the closing of the transaction.  



This new agreement replaces the previous merger agreement with Rite Aid, announced in October 2015 and amended in January 2017, and the agreement to divest certain Rite Aid stores to Fred’s, announced in December 2016. The initial closing of the new transaction is expected to occur within the next six months. Walgreens Boots Alliance also will assume certain limited store-related liabilities as part of the new transaction.

Walgreens Boots Alliance said it expects the new transaction to be modestly accretive to its adjusted diluted net earnings per share in the first full year after the transaction closes, with the expectation to realize synergies from the deal in excess of $400 million. These synergies are expected to be fully realized within three to four years of the initial closing of the new transaction, and will be largely derived from procurement, cost savings and other operational matters, the companies said.