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What FTC's Curtail on RAD Store Purchase Means for Walgreens?

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After a long-drawn tug-of-war with the U.S. Federal Trade Commission (FTC), finally it was Walgreens Boots Alliance’s (WBA - Free Report) turn to secure the purchase of a number of Rite Aid (RAD) stores last week. The company had ended up purchasing 1,932 stores, three distribution centers and related inventory from Rite Aid for a total transaction value of $4.375 billion.

However, the entire process has so far failed to make the investors happy.

Stages of Commotion

Notably, since 2015-end, Walgreens was caught in resolving the regulatory hurdle to acquire the entire U.S. retail pharmacy chain of Rite Aid. This effort eventually fell flat a couple of months back with FTC not approving of the mega merger.

While the pharmacy-led, health and well-being enterprise giant came up with an amended agreement, the investors were in shock about Walgreens’ shelving of the $17 billion acquisition deal, which had once promised a strong platform to develop the company’s’ brand presence as well as overall future business growth.

Investors eventually gained confidence delving into the original amendment’s details that mentioned about the buy of 2,186 Rite Aid stores and related assets for $5.175 billion. It was understood that the new agreement would enable Walgreens to purchase nearly half the Rite Aid business at a deal value, almost one-third of the original price. Notably, Rite Aid ran about 4,523 stores across 31 states and the District of Columbia as of Jun 3, 2017.

Close on the heels of this development, the final amended terms of the deal, which demanded acquisition of another 250 lesser number of stores from Rite Aid, came as a big blow to the investors.

Walgreens Still a Gainer?

Fortunately, the answer is yes. The final agreement retained the clause to allow Rite Aid to buy generic drugs sourced through a Walgreen’s affiliate at a cost equivalent to Walgreens’ for about 10 years. Also, Rite Aid will provide Walgreens with certain transition services for up to three years post the deal closure.

This apart, the deal’s financial outcome is pretty attractive. Post the new transaction’s initial closing, synergies of $300 million are expected to be entirely realized within four years of its initial completion.  This will be derived primarily from procurement, cost savings and other operational matters.

Per Walgreens, this modified merger contract will also extend its growth strategy and offer additional operational plus financial benefits. It will help the company expand and optimize retail pharmacy network in key U.S. markets including the Northeast.

Notably, the stores to be purchased are located primarily in the Northeast and the Southern United States, while the sites of three distribution centers to be bought are in Dayville, CT; Philadelphia, PA and Spartanburg, S.C.

This partial consolidation with Rite Aid will help Walgreens gain a competitive edge over names like Herbalife Ltd. (HLF - Free Report) , Wal-Mart Stores, Inc. (WMT - Free Report) and CVS Health Corporation (CVS - Free Report) .

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