Oct. 28--Less than a year after closing the biggest deal in its history to expand to Europe, Walgreens Boots Alliance is charging ahead with a new U.S. acquisition despite being in the middle of a massive restructuring.
The Deerfield-based company said Tuesday that it has agreed to acquire Rite Aid, America's third-largest drugstore chain with nearly 4,600 stores, for about $17.2 billion, including debt. Walgreens will pay $9 a share for Rite Aid, a 48 percent premium to the company's closing price on Monday.
The deal will significantly increase Walgreens' sales and prescriptions. Rite Aid, based in Camp Hill, Pa., had sales of $26.5 billion in the year ended Feb. 28. Prescriptions account for nearly 70 percent of the company's revenues.
Walgreens is bulking up at a time of massive upheaval in the health care industry. The Affordable Care Act has provided coverage to millions of Americans who were previously uninsured, but it also has sparked a wave of consolidation. Hospitals are buying physician groups to expand their networks. Insurers want scale to spread their fixed costs over a larger pool of customers. Drugmakers want more volume because the costs of discovering the next blockbuster are enormous and increasing.
Walgreens has been under pressure to reduce expenses to deal with higher drug costs and pressure from insurers and pharmacy benefit managers to cut reimbursement rates. Economies of scale will potentially give it a better shot to lower costs.
"Walgreens is doubling down on retail pharmacy," Adam Fein, president of Pembroke Consulting, a management advisory and business research company based in Philadelphia, said in an email. "The combined company will be a heavyweight negotiator with payers and suppliers."
The deal leaves two drugstore giants after years of mergers: Walgreens and CVS Health. Consumers, though, still have a lot of choices on where to fill prescriptions because Walmart and grocery chains have pharmacies.
In Illinois, Walgreens' acquisition of Rite Aid won't affect consumers because Rite Aid doesn't have any stores in the state.
But there is a big overlap in states like California, Michigan and New York, which could raise antitrust concerns. Joseph Agnese, an analyst at S&P Capital IQ, likes the deal and raised his expectations for Walgreens stock but also said the company will likely have to unload some stores to gain regulatory approval.
Under the terms, Walgreens will pay about $9.4 billion in cash for Rite Aid and assume about $7.8 billion in debt. The company said it will initially keep the Rite Aid brand name on stores, but "decisions will be made over time regarding the integration of the two companies."
Walgreens has been on a buying binge. Since 2010, the company has acquired New York pharmacy chain Duane Reade, Drugstore.com and USA Drug, helping it grow to about 8,300 U.S. stores and sales of $76.4 billion in the year ended Aug. 31, 2014.
The company is fresh off tying the knot with Switzerland-based Alliance Boots, which owned British drugstore chain Boots and a drug-distribution business in Europe. Walgreens renamed the company, but that was the least of the changes the deal spawned.
Greg Wasson, who had been Walgreens CEO since 2009 and was behind the deal-making, was pushed out at the end of last year in favor of Stefano Pessina, an Italian billionaire who led Alliance Boots. Pessina has replaced Walgreens management in Deerfield with his Alliance Boots team.
Under Pessina, Walgreens has embarked on a plan to cut costs by $1.5 billion by the middle of 2017. Part of the cost-cutting plans include 270 layoffs at headquarters and other suburban offices. The company also is remaking stores to focus more on beauty products.
But Walgreens still relies on prescriptions for about two-thirds of its sales at U.S. stores. And trends are favorable, including an aging population, longer life expectancy and expanding insurance coverage.
Walgreens said it expects the Rite Aid transaction to create more than $1 billion in corporate synergies.
"This combination will further strengthen our commitment to making quality healthcare accessible to more customers and patients," Pessina said in a statement. "Our complementary retail pharmacy footprints in the U.S. will create an even better network, with more health and wellness solutions available in stores and online."
Combining operations won't be easy. Rite Aid is struggling with a heavy debt load after acquiring some drugstore chains right before the recession and it hasn't made the same investment in stores that Walgreens and CVS have in recent years, analysts said.
"Walgreens itself is in the middle of its own turnaround story," said Vishnu Lekraj, an analyst at Morningstar in Chicago. "It's going to take a lot of work and great execution on the part of Pessina to turn both of these businesses around in the face of harsh head winds."
The Wall Street Journal first reported Tuesday morning that Walgreens and Rite Aid were close to a deal. The speculation sent Rite Aid's stock soaring 42.6 percent to close at $8.67. Walgreens rose $5.68, or 6.4 percent, to close at $95.16.
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