Walgreens Agrees to Buy Rite Aid for $9.4 billion
Deal creates drugstore giant amid a consolidating health-care industry
Walgreens has roughly 8,200 U.S. stores, while Rite Aid has about 4,600 stores in 31 states. PHOTO: CHARLES KRUPA/ASSOCIATED PRESS, NOAH BERGER/REUTERS
Walgreens Boots Alliance Inc. agreed to buy Rite Aid Corp. for about $9.4 billion, in a move that would create a drugstore giant at a time when companies in nearly every corner of the health-care industry are seeking to gain advantage from bulking up.
Walgreens agreed to pay $9 a share in cash for Rite Aid, offering a 48% premium to Rite Aid’s closing price Monday. Rite Aid’s stock rose 43% to $8.67 Tuesday after The Wall Street Journal reported on the deal talks. Walgreens shares rose 6.4% Tuesday to $95.16.
The deal between pharmacy chains adds to a blockbuster year for health-care mergers and acquisitions. Drug makers, hospital chains, health insurers and others have already struck some $520 billion of mergers this year, according to Dealogic, as the Affordable Care Act and other developments pressure companies to bulk up, increase leverage with suppliers and lower costs. The surge comes amid a broader wave of M&A, with 2015 set to be one of the busiest years ever for M&A.
Putting their drugstore networks together—which together include some 13,000 U.S. stores—could yield cost savings at a time when the companies have been beset by drug-cost inflation. Other benefits could be derived from marrying Walgreens’ wholesale operation with Rite Aid and Rite Aid’s prescription-processing operation with Walgreens.
But given they are two of the three-biggest drugstore owners in the country, the deal would be expected to draw scrutiny from antitrust regulators and big divestitures could be required to win their blessing. Both companies have big store counts in states like California, New York and Massachusetts, while in others like Florida, Texas and Illinois, there is no overlap.
The companies said the deal had an enterprise value of $17.2 billion, which includes debt. Rite Aid’s debt load totaled $7.4 billion in August.As with a number of recently agreed corporate marriages that face antitrust scrutiny, Walgreens and Rite Aid are likely to argue that they compete not just with other traditional drugstore chains, but also with groceries, club stores and the like.
Rite Aid, based in Camp Hill, Pa., has about 4,600 drugstores in 31 states. Walgreens has roughly 8,200 U.S. stores, while CVS Health Corp. has more than 7,800. In terms of market value, Rite Aid is much smaller than Walgreens and CVS, which both have values exceeding $100 billion. Rite Aid had revenue in the fiscal year ended in February of $26.5 billion. Walgreens had revenue in the 12 months ended in August 2014 of $76.4 billion, while CVS had 2014 sales of $139.4 billion.
Rite Aid, like its rivals, has sought to broaden its offerings to boost sales amid increased competition.
The company has expanded its RediClinics, walk-in centers that can give flu shots and tend to ailments, and built a portfolio of 1,859 wellness stores, which offer organic food and natural personal-care options, and feature consultation rooms for discussions with pharmacists.
Rite Aid this year bought pharmacy-benefit manager Envision Pharmaceuticals Services, or EnvisionRx, for about $2 billion. Pharmacy-benefit managers process prescriptions for the groups that pay for drugs, usually insurance companies or corporations, and use their size to negotiate better deals with drug makers and pharmacies. They often operate mail-order pharmacies too.
In September, Rite Aid cut its earnings outlook in part because of costs associated with the EnvisionRx deal. That had contributed to a nearly 20% reduction in Rite Aid’s share price this year before news of the Walgreens talks leaked. That decline may help explain the above-average share-price premium Walgreens appears to be paying.
Walgreens, which is to report its results Wednesday, has more than 13,200 stores in 11 countries. The company operates under the Walgreens and Duane Reade banners, and in the U.K. and elsewhere as Boots. It also has one of the largest pharmaceutical wholesale and distribution networks in the world. Walgreens was founded in 1901 when Charles R. Walgreen Sr. purchased the Chicago drugstore where he had worked as a pharmacist.
Last year, Walgreens acquired the part of European drugstore chain Alliance Boots GmbH that it didn’t already own. Under pressure from shareholders, including activist investor Jana Partners LLC, Deerfield, Ill.-based Walgreens considered using the acquisition to relocate overseas in a so-called “tax inversion”—a type of deal that is used to make a U.S. company more tax-efficient. Walgreensultimately decided against relocating.
The company’s chief executive is Stefano Pessina, a septuagenarian Italian billionaire who took the role on a permanent basis in July and served as executive chairman of Alliance Boots before the merger with Walgreens. Mr. Pessina hasn’t been shy about his desire to do big deals. “We can clearly see the need or the opportunity for horizontal and vertical consolidation in our industry,” he said on a conference call in July.
MARKET TALK
Rite Aid Deal Casts Doubt on Express Scripts-Walgreens Tie Up. News of the talks with Walgreens sent Rite Aid shares soaring, but had a negative impact on an unlikely company. Express Scripts shares initially fell more than 5%, taking hope off the table that Walgreens would turn its attention to the prescription-drug benefits giant, which has a $58 billion market value. Share have since regained some of the loss.(dana.mattioli@wsj.com; @DanaMattioli)
Pharmacy Merger News a $250M Windfall for KKR. Investors are applauding news that pharmacy giant Walgreens is in advanced talks to acquire rival Rite-Aid, sending shares of both chains climbing. The Walgreens pop gives a shot to KKR, which owns a 4.6% stake of Walgreen and reports third-quarter earnings after market. KKR said in a securities filing that as of June 30 it owned 49.9 million Walgreens shares, translating to a roughly $250 million gain on the merger news, further sweetening one of the private-equity firm’s best-ever deals at well over four times KKR’s investment. (ryan.dezember@wsj.com; @RyanDezember)
Always If, Now When, For Next Walgreens’s Deal. For Walgreens, it was always a matter of if, not when, they’d pull the trigger on the next big deal. And now they appear to have it, with Walgreens in talks with Rite Aid, according to the Journal. A large part of Walgreens’s acquisitive ambitions stems from its CEO, the serial dealmaker Stefano Pessina. The Italian billionaire took control of the company after it bought his Alliance Boots chain, and he has long spoken of opportunities all sorts of mergers or joint ventures in the rapidly changing U.S. healthcare market. Walgreens, and Pessina, weren’t going to stand on the sideline as that happened. (paul.ziobor@wsj.com; @pziobro)
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Mr. Pessina transformed a small family business into a European drug retailing and wholesaling powerhouse through a series of takeovers. In 2007, he took the company private in an $18.5 billion leveraged buyout with KKR & Co. At year-end, KKR still owned about 4.6% of Walgreens stock.
In 2013, AmerisourceBergen Corp.began an alliance with Walgreens and Alliance Boots before they merged. Walgreens Boots Alliance now has a minority stake in the drug wholesaler, but it doesn’t own its own pharmacy-benefit company like some of its rivals do. CVS, for example, is the second-largest pharmacy-benefits manager in the U.S., following its roughly $25 billion acquisition of Caremark in 2007.Express Scripts Holding Co. is No. 1.
A deal would come on the heels of awave of consolidation among the biggest managed-care companies. If approved by regulators, they would shrink five major players in the U.S. to three. Aetna Inc. agreed to buy Humana Inc. for $34 billion in July. Just weeks later, Anthem Inc. agreed to buy Cigna Corp. for $48 billion.
