By Garrick Brown, Vice President of Retail Research, Americas
Here is a quick update on the Walgreen’s-Rite Aid merger… The deal had until January 27th to be approved by the FTC. That did not happen in its current proposed state but Walgreen’s and Rite Aid have amended and extended their merger agreement to July 27, 2017. However, there were some notable changes in the amended agreement. Both parties have agreed to reduce the price for each share of Rite Aid stock to be paid for by Walgreens. The original price was $9 per share. The revised price will be a minimum of $6.50 per share and maximum of $7.00 per share. Also, Walgreens may be required to divest up to 1,200 Rite Aid stores and certain additional related assets if required to obtain regulatory approval. The exact share price will be determined by how many stores need to be divested. So if Walgreen’s needs to offload 1,000 Rite Aid stores the revised price will be $7.00 per share. If they need to divest 1,200 stores the price is $6.50 per share. All told, this reduces the value of Rite Aid’s equity by at least $2.10 billion to a range of $6.80 billion to $7.40 billion. The total enterprise value of the transaction, including the assumption of Rite Aid’s net debt, is between $13.90 billion and $14.50 billion.
Now keep in mind that under the original agreement Walgreens agreed to divest up to 1,000 Rite Aid stores. No comment was made on the potential Fred’s deal which would have seen them acquiring 865 locations. Rumor on the street had been that the FTC was not satisfied with the sale to Fred’s, with the logic being that while Fred’s would instantly catapult into the number three position for US drug store chains, it would be doing so with a leveraged capital structure and weak operating margins. Yet, nothing has been said as to whether the Fred’s deal has been officially nixed and the rumor going around is that it is not… but that all the parties are potentially looking at tweaking the deal. How reliable is that rumor? It’s anyone’s guess. One thing that appears certain is that if we are talking about more divestitures for Walgreens that it is highly likely that other players are in the game again. This could mean private equity, it could mean Kroger and/or Albertson’s and it certainly means Fred’s is likely still in play but perhaps in a smaller deal. With an extra seven months to get the deal done this is not a bad thing for Walgreens who theoretically could command better pricing for these divested locations by selling off in more bite-size chunks to multiple players (well, that is if you would call hundreds of drug stores at a time “bite-size”). Regardless, the deal is not dead and considering the lower price of Rite Aid shares and the potential to maybe earn more off the divested locations, this is not necessarily a bad thing for Walgreens.
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Garrick serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.