Former Walgreens CEO offers perspective on WAG-RAD merger speculation

Credit Suisse's Edward Kelly interviews Jeff Rein in conference call

NEW YORK — Walgreens might be willing to acquire Rite Aid if it can't settle an ongoing contractual dispute with one of the country's largest pharmacy benefit managers, Walgreens' former CEO said in a conference call with investors Monday.

Interviewed by Credit Suisse analyst Edward Kelly, former Walgreens CEO Jeff Rein suggested that Walgreens' board "would have the stomach" to buy Rite Aid if it doesn't reach an agreement with Express Scripts, as buying Rite Aid's nearly 4,700 stores would give Walgreens considerable leverage against the PBM.

"If they don't see any other possibility of growing their business, then they could execute it, and they could go after it," said Rein, who worked at Walgreens for 26 years before abruptly retiring as chairman and CEO in October 2008.

Rein said Walgreens has generally pursued organic growth rather than growing through acquisitions, especially since a bad experience in the 1980s when it acquired New England chain Medi Mart's 66 stores and had to close all but a handful of them. But the company's board has changed, and its attitude may have changed as well.

"I do believe that Walgreens is a little more eager and willing to do deals than in the past," Rein said.

Another experience Rein cited was when CVS bought Eckerd's more than 1,000 stores in the South in 2004. At that time, he said, the stores were dirty and poorly laid out, items were out of stock and service was poor, resulting in Walgreens comps that went "through the roof" as customers were willing to go further to get to a Walgreens and avoid Eckerd. But when CVS bought them, he said, it rebranded and remodeled them and managed to siphon sales off of Walgreens' stores.

"I don't think [acquiring Rite Aid] would be quite as successful as the CVS takeover of Eckerd, but I believe in many locations, it could approach it," Rein said.

The conference call came in the wake of a report issued last week by Kelly in which he laid out the case for a Walgreens acquisition of Rite Aid, putting the probability at 1-in-3. Rite Aid's stock shot past the $2 mark following the report's release.

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