Analyst take: New Walgreens-Rite Aid deal a ‘good compromise’ if regulators approve it
The news that Walgreens is to scrap its $9.4 billion merger with Rite Aid is unsurprising. The glacial pace of the Federal Trade Commission investigation and increasing signals that the federal government would disallow the merger have forced a rethink.
In some ways, the process so far has been a colossal waste of resources and effort. Walgreens has to pay out a $325 million termination fee to Rite Aid, and all parties — including Fred's, which was due to acquire some Rite Aid stores — have invested time and money with very little to show for it.
We are highly critical of the FTC's involvement in this process, just as we are of the body in general. When it comes to retail matters, we believe it to be both inefficient and ineffective. Its previous decisions, such as the instance that Dollar Tree disposes of Family Dollar stores during acquisition, and that Albertsons-Safeway sells off stores during their merger, have resulted in failure. In both cases, the spin-offs, designed to provide more choice to consumers, went bankrupt and ended up back in the hands of larger players. For us, this underscores the government's complete lack of understanding of how the retail market works in practice — something we believe was at play in the case of Walgreens.
Fortunately, Walgreens and Rite Aid have taken a pragmatic approach and replaced the merger with a deal under which Walgreens will buy 2,186 Rite Aid stores, related distribution assets, and some inventory for $5.175 billion. While this will still be subject to FTC scrutiny, it will, at least in theory, be easier to gain approval because it avoids the dilution of store competition in some markets and leaves Rite Aid as a viable player in the pharmacy space.
For Rite Aid, the deal is a good one. The proceeds of Walgreens' payment will allow it to reduce debt and restore its balance sheet to health. The company's first-quarter results, which were also released today, show the imperative of doing this: the $109 million interest payment dragged it down to a net loss of $75.3 million — an unsustainable position.
The question, of course, is how Rite Aid will survive as a smaller entity. After the deal, the group will have 2,337 stores — around half the number it has now. This will be punishing on economies of scale, especially for a company that is already struggling to turn a profit even before interest payments are taken into account. The answer lies in the agreement with Walgreens, which will allow Rite Aid to become a member of Walgreens Boots Alliance's group purchasing organization. In our view, this will be highly beneficial and will allow Rite Aid to improve pharmacy margins drastically.
For Walgreens, the deal allows it to boost both the top and bottom lines at a time when growth is harder to come by. In our view, there will be some near-term benefits, but most of the synergistic savings and improved turnover will accrue over a period of three years. The costs of converting stores to the Walgreens format should, by and large, be neutral thanks to the improved margins Walgreens brings, and the uplift in sales from the stronger brand and improved store format.
In our view, while the deal is not the deal of choice for either Walgreens or Rite Aid it is a good compromise that brings benefits to both parties. Ironically, it is also one that means Rite Aid will effectively become a part of Walgreens network, albeit with a degree of operational and managerial independence. Of course, all of this remains subject to approval and all eyes now turn to the FTC for its decision on this latest move.
Neil Saunders is the managing director of GlobalData Retail.
DSNTV: Walgreens’ Alex Gourlay shares his goals as NACDS chairman
At the National Association of Chain Drug Stores Annual Meeting, Walgreens Boots Alliance co-COO Alex Gourlay took over the organization’s chairmanship from H-E-B chief merchant Martin Otto. Ahead of his first official speech as chairman, Gourlay sat down with Drug Store News editor in chief Rob Eder at the NACDS Annual Meeting to discuss the new efforts from NACDS around its future value targeting initiative.
“This idea of being a think tank and thinking like a startup is something I’m really supportive of,” Gourlay said. “From a personal point of view, I want to put the customer and the patient absolutely at the heart of NACDS and the NACDS marketplace.”
Watch the video above to hear more from Gourlay about his plans for NACDS, his views on the state of the industry and some of the insights he’s gained about business after being in the industry since he first started working at the Boots in his native Glasgow, Scotland, at 17 years old.
Rite Aid Q1 revenues decline 4.9% to $7.8 billion
CAMP HILL, Pa. — Rite Aid on Thursday reported revenues of $7.8 billion, a decrease of 4.9%. Net loss totaled $75.3 million, or $0.07 per diluted share, and adjusted net loss was $52.4 million, or $0.05 per diluted share.
Retail Pharmacy Segment revenues were $6.4 billion and decreased 4.9% compared to the prior year period primarily as a result of a decrease in same-store sales and reimbursement rates. Revenues in the company's Pharmacy Services Segment were $1.5 billion and decreased 5.6% compared to the prior year period, due to an election to participate in fewer Medicare Part D regions, which caused a decrease in covered lives at Envision Insurance Company.
Same-store sales for the quarter decreased 3.9% over the prior year, consisting of a 5% decrease in pharmacy sales and a 1.5% decrease in front-end sales. Pharmacy sales included an approximate 222 basis point negative impact from new generic introductions. The number of prescriptions filled in same stores, adjusted to 30-day equivalents, decreased 1.1% over the prior year period due in part, to exclusion from certain pharmacy networks that Rite Aid participated in the prior year. Prescription sales accounted for 67.9% of total drug store sales, and third party prescription revenue was 98.3% of pharmacy sales.
Rite Aid also announced that it has entered into an asset purchase agreement with Walgreens Boots Alliance, whereby WBA will acquire 2,186 stores, related distribution assets and inventory from Rite Aid for an all-cash purchase price of $5.175 billion, on a cash-free, debt-free basis. Under the terms of the agreement, Rite Aid has the option to purchase generic drugs that are sourced through an affiliate of WBA at cost, substantially equivalent to Walgreens for a period of 10 years.
Rite Aid expects to use a substantial majority of the net proceeds from the transaction to repay existing indebtedness, significantly reducing Rite Aid's leverage levels. Rite Aid also expects that the federal tax gain on the sale of the assets will be largely offset by its net operating loss carryforwards, resulting in a minimal cash tax payment on this transaction.
Following the completion of the transaction, Rite Aid will continue to operate EnvisionRx, its pharmacy benefit manager, RediClinic and Health Dialog and leverage the capabilities of these subsidiaries to deliver a higher level of care in the communities it serves.
"I would like to thank our entire Rite Aid team for their extraordinary efforts during this process and their tremendous focus on taking great care of our customers and patients," stated John Standley, chairman and CEO Rite Aid. "We have an outstanding team of associates and, with their continued support, we will work together to deliver a great customer experience, improve our business and deliver value to all of our stakeholders."
In the first quarter, the company opened one store, relocated four stores, remodeled 67 stores and expanded one store, bringing the total number of wellness stores chainwide to 2,482. The company closed 14 stores, resulting in a total store count of 4,523 at the end of the first quarter.