Nearly two years after initially announcing a merger with Rite Aid, Walgreens has finally received regulatory approval to acquire a significant chunk of its rival’s real estate. While a true pharmacy mega-merger will not occur, Walgreens will purchase 1,932 Rite Aid stores, three distribution centers and related inventory for $4.375 billion in cash.
The store purchases are expected to begin in October, with completion anticipated in Spring 2018; the distribution centers’ transition to new ownership won’t begin for at least one year. The stores are located primarily in the Northeastern and Southern U.S., and will be converted to the Walgreens brand in phases.
The deal will widen Walgreens’ U.S. footprint and will help the pharmacy negotiate with drug manufacturers for lower drug costs. But consumer concerns remain, as there also is a possibility that health care premiums will increase if third-party pharmacy benefit managers (PBMs) transfer higher costs to insurance providers. For the time being, these consequences will not be as drastic as they might have been if Walgreens and Rite Aid had merged, because both companies will still have incentives to negotiate for lower prices.
The Federal Trade Commission (FTC) initially blocked the merger in June 2017, citing antitrust concerns within the drugstore sector. Walgreens said it was willing to divest as many as 1,200 stores to obtain regulatory approval. At the time, both drugstores were set to sell 865 Rite Aid stores to Fred’s Pharmacy for $950 million to move the process forward, but the deal fell through upon the FTC’s decision.
The parties set new terms for the deal that month: Walgreens would acquire 2,186 Rite Aid stores for $5.175 billion. These terms were themselves amended, in part because New York State Attorney General Eric Schneiderman was outspoken about the potential deal. Originally Walgreens would have acquired 456 Rite Aid stores in the state. Under the new terms, Walgreens will only take over 272 Rite Aid sites in New York.
“Vigorous competition between pharmacy chains keeps down the cost of filling a prescription, which benefits New York consumers and businesses by preserving choice and keeping costs low,” said Schneiderman in a statement.
The deal gives Rite Aid the option (through May 2019) to become a member of Walgreens Boots Alliance’s group purchasing organization, Walgreens Boots Alliance Development GmbH. As part of this organization, Rite Aid could negotiate discounts on generic drug prices.
Walgreens will have nearly 10,000 locations following the deal, just edging out the 9,600+ operated by rival CVS. Rite Aid will still have more than 2,500 stores. With the deal in place, Walgreens expects to save about $300 million annually through cost cuts over the next four years.