Walgreens, Rite Aid Unite to Create Drugstore Giant

Walgreens Boots Alliance Inc. agreed to buy Rite Aid Corp. for about $9.4 billion, in a move that would create a drugstore giant as companies across the U.S. health-care industry look for ways to bulk up.

Walgreens agreed to pay $9 a share in cash for Rite Aid, offering a 48% premium to Rite Aid’s closing price Monday.

Rite Aid’s stock rose 43% to $8.67 on Tuesday after The Wall Street Journal reported on the merger talks. Walgreens shares rose 6.4% Tuesday to $95.16.

The deal, which would unite two of the country’s three biggest drugstore owners, would be likely to draw scrutiny from antitrust regulators, who could demand divestitures in exchange for their approval.

It also adds to a blockbuster year for health-care mergers and acquisitions, helping to put 2015 on track to be the busiest year ever for M&A. Including assumed debt, the transaction is valued at $17.2 billion. Rite Aid’s debt totaled $7.4 billion in August.

Drug makers, hospital chains, health insurers and others have already struck some $427 billion of merger deals in the U.S. this year, according to Dealogic, as the Affordable Care Act and other factors spur them to seek more leverage with their suppliers and cut costs. By combining their drugstore networks, which together include roughly 13,000 U.S. stores, Walgreens and Rite Aid, which have both been pinched by drug-price inflation, could reap considerable savings.

Rite Aid, based in Camp Hill, Pa., has about 4,600 drugstores in 31 states. Walgreens has roughly 8,200 U.S. stores, while CVS Health Corp. has more than 7,800.

Both Rite Aid and Walgreens have a major presence in states like California, New York and Massachusetts, while in others, including Florida, Texas and Illinois, there isn’t any overlap.

And Walgreens and Rite Aid would be likely to argue to regulators that they compete not just with other traditional drugstore chains, but also with companies such as groceries and club stores.

In terms of market value, Rite Aid is much smaller than Walgreens and CVS, which both have a market capitalizations of more than $100 billion. Rite Aid had revenue of $26.5 billion in the fiscal year ended in February. In the fiscal year ended in August 2014, Walgreens had revenue of $76.4 billion. CVS had 2014 sales of $139.4 billion.

Rite Aid, like its rivals, has sought to broaden its business lines to boost sales amid increased competition. The company has expanded its RediClinics, walk-in centers that can give flu shots and tend to ailments. It also has built a portfolio of 1,859 wellness stores, which offer organic food and natural personal-care products and feature consultation rooms for discussions with pharmacists.

This year Rite Aid bought pharmacy-benefit manager Envision Pharmaceutical Services, or EnvisionRx, for about $2 billion. Pharmacy-benefit managers process prescriptions for the groups that pay for drugs, usually insurance companies or corporations, and use their size to negotiate better deals with drug makers and pharmacies. They often also operate mail-order pharmacies.

In September, Rite Aid cut its earnings outlook in part because of costs associated with the EnvisionRx deal. That had contributed to a nearly 20% reduction in Rite Aid’s share price this year before news of the Walgreens talks leaked. That decline might help explain the above-average share-price premium Walgreens is paying.

Walgreens, which is to report its results Wednesday, is the product of acquisitions, giving it more than 13,200 stores in 11 countries. The company, based in Deerfield, Ill., operates under the Walgreens and Duane Reade banners, and in the U.K. and elsewhere as Boots. It also has one of the largest pharmaceutical wholesale and distribution networks in the world. Walgreens was founded in 1901 when Charles R. Walgreen Sr. purchased the Chicago drugstore where he had worked as a pharmacist.

Last year, Walgreens acquired the part of European drugstore chain Alliance Boots GmbH that it didn’t already own. Under pressure from shareholders, including activist investor Jana Partners LLC, Walgreens considered using the acquisition to relocate overseas in a so-called “tax inversion”—a type of deal that is used to make a U.S. company more tax-efficient. Walgreens ultimately decided against relocating.

The company’s chief executive is Stefano Pessina, a septuagenarian Italian billionaire who took the role on a permanent basis in July and served as executive chairman of Alliance Boots before the merger with Walgreens.

Mr. Pessina hasn’t been shy about his desire to do big deals. “We can clearly see the need or the opportunity for horizontal and vertical consolidation in our industry,” he said on a conference call in July.

Mr. Pessina transformed a small family business into Alliance Boots, a European drug retailing and wholesaling powerhouse, through a series of takeovers. In 2007, he took the company private in an $18.5 billion leveraged buyout with KKR & Co. At year-end, KKR still owned about 4.6% of Walgreens stock.

source: wsj.com By DANA MATTIOLI, MICHAEL SICONOLFI and DANA CIMILLUCA

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