Will Walgreens acquire Rite Aid?

Mar 24, 2015

Walgreens, once known for growing the organic way, may be looking to add stores in the U.S. through acquisition, this based on a statement made to Reuters a couple of weeks back by Stefano Pessina, acting CEO of Walgreens Boots. The speculation is that Rite Aid, the third largest drugstore chain in the U.S., may be the top target.

Mr. Pessina said the likelihood of a deal in the U.S. is greater because of the size of the market and because of opportunities opening up for drugstores as a result of the implementation of the Affordable Care Act.

Speculation of a possible deal has focused on Rite Aid because of its size, improving performance and a recent deal to acquire Envision Pharmaceutical, a full service pharmacy benefits manager (PBM). Rite Aid has benefited as the chain’s share price has risen along with the gossip.

Walgreens, which has been at loggerheads with Express Scripts over reimbursement rates, would be able to put more pressure on the PBM if it acquired Rite Aid because of its increased purchasing power and connection to its Envision.

Former Walgreens CEO Jeff Rein said the chain may be interested in acquiring its smaller rival, particularly if it is not able to come to an agreement with Express Scripts. Mr. Rein told Credit Suisse analyst Edward Kelly, Walgreens was "a little more eager and willing to do deals than in the past."

Mr. Kelly estimates that a merger between the two drugstore chains would result in cost savings of between $400 million and $650 million. He believes Walgreens would need to divest more than three percent of its stores to get the approval of the Federal Trade Commission.

According to a New York Times DealBook report, the combination of the two chains would result in the combined company having a 46 percent market share in the New York metro market and 37 percent in Los Angeles.

The deal, if approved, would have downsides, including increased borrowing costs for Walgreens Boots as its credit rating fell. The company would also have to deal with stores represented by unions. Thirty-percent of Rite Aid’s workforce currently belongs to a union.

Do you think Walgreens should pursue a deal to acquire Rite Aid? Will a merger of the two companies result in a stronger single entity?

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8 Comments on "Will Walgreens acquire Rite Aid?"

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Dr. Stephen Needel
7 years 2 months ago

I’m surprised they would only have to divest 3 percent of their stores—in my neck of the woods there’s a Rite Aid close to every Walgreens I can think of. Again, here in Atlanta, Rite Aid stores are smaller than Walgreens. I guess there may be some financial benefit to owning the prescription service but they may be better served by working things out with Express Script.

Max Goldberg
7 years 2 months ago

I can understand why Walgreens might seriously pursue Rite Aid, but it will hurt competition and be bad for consumers. Why should any retailer be allowed to merge its way to a 46 percent market share?

Prior to big mergers management always touts the huge savings that will result. Rarely is that savings realized, and it is infrequently passed along to consumers. Competition, not sheer size, make companies stronger.

Steve Montgomery
7 years 2 months ago

If Walgreens were to acquire Rite Aid they would have to divest of some of their locations. I would expect in areas such as Stephen referred to where both companies operate in close proximity it would likely mean closing Rite Aid locations, i.e., network rationalization.

Walgreens would be for the first time dealing with a union environment. Whether you agree or disagree with the concept of unions, there is definitely an impact on store operation, H.R., etc., with a unionized workforce. Add that to all the issues that any large acquisition and integration brings and Walgreens may find the cost savings they are projecting to be high.

Gene Detroyer
7 years 2 months ago

Study after study shows that horizontal mergers in mature markets will fail (as measured in increase in shareholder value) in excess of 80 percent of the time. This deal is as horizontal as one can get and in a market that is extraordinarily mature.

As is typical in these types of deals, there is always the forecast of cost savings and synergies. However, nobody seems to forecasts the costs—investment bankers, lawyers, accountants, closing stores, laying off people. And with regard to closing stores, the government may dictate dropping 3 percent of the stores, but anywhere I have been where there is a Rite Aid, there is a Walgreens a stone’s throw away, if not across the street.

And how about the dis-synergies? Are they forecasting how many Rite Aid customers will not remain Walgreens customers? Once you put a customer in play, they can go anywhere.

If the real issue is a PBM then Walgreens should focus on that. This deal is an expensive way to acquire a PBM.

Ed Rosenbaum
7 years 2 months ago

Sure it would mean a stronger entity. But by how much? There will have to be a larger number of store closings than stated because of the proximity of many locations. Walgreens makes for a better partner in this than Walmart in my estimation. Maybe we will see another bidding war like with the dollar stores.

Roger Saunders
7 years 2 months ago
Some caution here on the strategy. Based on the Prosper Monthly Consumer Survey (January, 2015) only a small percentage of Rite Aid shoppers chose Walgreens as a second choice, preferring instead to cross over to CVS or Walmart when they are not visiting Rite Aid. That could spell opportunity if the consumer does not have a Walgreens in close proximity, and a new, closer box becomes available with a Walgreens banner. It could also mean that consumers who have a Rite Aid and CVS in the area (largely Northeast U.S.) would simply choose CVS due to familiarity. The Envision opportunity is a solid leverage play, as Walgreens has a need to be healthy in PBM. Perhaps the larger issue is a cultural one. Merged/acquired companies continuously miss the culture aspect of bringing the “new” firm together. Walgreens has historically enjoyed long-term employee relationships, and did not have to deal with an arbiter in the form of a union. Put a yellow light on this one and make sure they are looking at how to execute… Read more »
Raymond D. Jones
Raymond D. Jones
7 years 2 months ago

It is important to remember that Rite Aid itself is a conglomeration of multiple chains including Eckerd, Brooks and others. They have struggled to build real brand equity with shoppers. I fear that any Walgreens/Rite Aid merger would suffer from the same issues.

Besides, these deals seldom result in the savings that is touted as a rationale for the combination. WBA should focus on realizing the projected value from the still-recent merger.

Craig Sundstrom
7 years 2 months ago

Looks like everyone is on board with this….

Seriously, though, this is the consumer-oriented blog—or at least the blog for people who deal with them on a regular basis—I suspect the question asked on “InvestorWire” or “OligopolyChat” would have gotten a different response.


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