Former Walgreens CEO offers perspective on WAG-RAD merger speculation
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.
WAG-RAD merger possible, but not likely
WHAT IT MEANS AND WHY IT’S IMPORTANT — A miniature version of the spike in stock market activity that followed speculation about the prospects of a Walgreens-Rite Aid merger happened on Drug Store News‘ website as a quick writeup about the potential deal became the most-read story on the site.
(THE NEWS: Reports: WAG-RAD merger speculation drives RAD stock to four-year high. For the full story, click here)
But for all the buzz that Credit Suisse analyst Edward Kelly created with his report, a Walgreens-Rite Aid merger appears pretty unlikely on closer inspection.
For one, neither company has made any noise about the idea of a merger and, pursuant to respective company rules, neither has offered comment to news media. All in all, it’s starting to sound like a repeat of when analysts from Susquehanna Financial Group offered similar speculation in November.
On top of that, a merger wouldn’t make a lot of sense for either company, even considering Kelly’s view that it would give Walgreens more leverage in its continuing dispute with Express Scripts.
Kelly himself put the probability of a deal at one-in-three, writing, "Ultimately, a deal could carry too much risk for a traditionally conservative Walgreens." Walgreens has historically guarded its credit rating very closely, and an all-cash deal to buy Rite Aid for $8 billion would probably reduce that rating to just above junk status, he wrote. In addition, unlike CVS and Rite Aid, Walgreens has generally pursued organic growth rather than large-scale acquisitions, and Guggenheim Partners analyst John Heinbockel noted that its relative lack of experience with large-scale acquisitions could hinder a deal with Rite Aid; even its 2010 acquisition of Duane Reade doesn’t count, considering that when it bought that chain, it retained the Duane Reade brand rather than converting the stores. Walgreens’ historical aversion to large-scale acquisitions is due in part to being burned in the 1980s by its purchase of 66 Medi Mart stores in New England, when it had to close all but a handful of them, as former CEO Jeff Rein said in a conference call Monday with Kelly. And the expenses associated with buying Rite Aid wouldn’t stop with the acquisition itself: As noted by Heinbockel, Walgreens would have to spend a further $1 billion to $2 billion to convert the Rite Aid stores, and Kelly wrote that it would have to close 250 to 350 of them to satisfy antitrust regulations.
And for all its problems with debt and underperforming stores, Rite Aid isn’t exactly screaming for salvation, either. In the conference call, Rein noted that when CVS bought more than 1,000 Eckerd stores in the South, those stores were already ailing, and Walgreens’ comps were "through the roof" as a result, but that soon changed when CVS converted the stores and improved them.
But Rite Aid is a different story. The company has lately pursued organic growth, particularly through its Wellness+ loyalty card program, launched nationwide in April 2010, and the conversion of its stores to the new Wellness format, in addition to closing underperforming stores. Not only has Wellness+ resulted in strong sales growth for Rite Aid, but it and the Wellness stores indicate that Rite Aid is interested in growing as a company rather than making itself look like an attractive acquisition target.
A Walgreens acquisition of Rite Aid is certainly possible — nobody can predict the future, after all — but it doesn’t seem like it’s going to happen any time soon.
Crystal Bowersox to give acoustic performance for Walk with Walgreens event
HOLLYWOOD, Fla. — "American Idol" sensation Crystal Bowersox will deliver an acoustic performance at the second Walk with Walgreens Family Fun Day and Health Fair, to be held March 24, the Diabetes Research Institute Foundation announced Friday.
Walgreens of South Florida has been encouraging customers, employees and community members to participate in the Walk throughout stores and via its dedicated website, WalgreensWalkDRI.com. More than 5,000 people are expected to participate simultaneously at five locations. "Promoting good health in our community is part of the ‘Walgreens Way,’ as we say," said Roy Ripak, market VP at Walgreens. "And there’s no better way to promote it than to get out there ourselves and do it."
Walgreens pharmacists will be on hand for the event, as will representatives from various health-related vendors. "Last year, we were so impressed by the efforts Walgreens made to create this fundraiser for us. It is exciting to see the event, as well as our partnership, grow," stated Robert Pearlman, president and CEO of the Diabetes Research Institute Foundation. "And we couldn’t be more thrilled to have a well-known diabetes advocate like Crystal Bowersox perform for everyone."
Bowersox, 26, is insulin-dependent and was diagnosed with Type 1 diabetes when she was 6 years old. Also available for autographs will be the Miami Dolphins cheerleaders, as well as former Dolphins players.