The Path to a Walgreens – Rite Aid Merger

Rite Aid Pharmacy stock prices continued to trend downward over the past month as its planned acquisition by Walgreen Boots Alliance remains with the Federal Trade Commission awaiting approval. Since the announcement of the proposed deal in October 2015, one that would create the largest drug-store chain in the US, reports, speculation and hunches as to the FTC’s feelings on the antitrust implications have been bandied about. One week’s reports of hope for a deal with the FTC are replaced with the next week’s pessimism.

All parties, and reports, seem to agree that the companies will need to divest themselves of stores in markets where the combined presence would prove detrimental to competition. Current estimates on the number of stores to be jettisoned to gain FTC favor range from 500 (the number publicly backed by Walgreens CEO Stefano Pessina early in July) to 1,000 (a nice round number analysts fancy and one that Pessina had mentioned in the past). Estimates of 2,000 or 3,000 units that gained currency when the deal was first announced have fallen out of favor.

Selling off even 500 stores won’t be a simple proposition, if CVS is not willing or able to buy the lot (the FTC may not agree that a competitive mix in affected markets is achievable by a large-scale CVS purchase). That leaves the rest of the market to absorb these stores, and a quick look at the chart below demonstrates that this route will require multiple purchasers. The size of next-largest competitors makes it unlikely any of them have the ability to take on a couple hundred pharmacies (as CVS did with its Target pharmacies acquisition).

Independent franchise/distribution networks Good Neighbor Pharmacy and Health Mart are another possibility, as these organizations possess the internal logistical capabilities. The challenge this scenario presents is getting hundreds of independent pharmacists hooked up with new stores.