Walgreens To Make Modifications To Rite Aid Deal

Walgreens Boots Alliance Inc. (NASDAQ:WBA) is reportedly planning to modify its agreement to buy Rite Aid Corp. (NYSE:RAD) stores to resolve outstanding antitrust concerns. The companies and the Federal Trade Commission are close to an agreement that would allow the deal to proceed, according to sources who declined to be identified because the talks are confidential.

Walgreens had previously announced plans to buy more than 2,000 Rite Aid stores. According to one of the sources, the number of stores involved in the revised transaction won’t dramatically change. The deal would make Walgreens the No. 1 pharmacy chain in the U.S. by number of store locations, topping market leader CVS Health Corp.

The move may be enough to clinch U.S. approval for the deal. The companies have been pursuing a deal in different forms for two years. Walgreens and Rite Aid declined to comment about the negotiations.

The modified deal would be the fourth attempt by Walgreens to win approval for a transaction with Rite Aid. Walgreens initially planned to buy Rite Aid outright with a takeover announced in October 2015, but that deal was blocked by the FTC over concerns that the combination of the pharmacy chains would hurt competition.

Walgreens and Rite Aid recut the deal in an attempt to resolve the agency’s concerns, but again failed to win over the regulator. In its third proposal, the company planned to pay $5.18 billion to acquire 2,186 stores, mostly located along the East Coast, and three distribution centers. The deal would leave Rite Aid as a slimmed-down, stand-alone company.

The deal also includes an option for Rite Aid to buy generic drugs through a Walgreens affiliate at cost for a period of 10 years. John Standley, Rite Aid chairman and CEO, said in a statement in June, “The transaction offers clear solutions to assist us in addressing our pharmacy margin challenges and allows us to significantly reduce debt, resulting in a strong balance sheet and improved financial flexibility moving forward at that time.”

By terminating prior agreements, Walgreens is set to pay Rite Aid a $325 million all-cash fee. After the limited details were released, Rite Aid shares jumped as much as 5.3 percent in New York. Walgreens gained 1 percent.

The deal would be victory for Walgreens and its Chief Executive Officer Stefano Pessina. The FTC may still issue a second request seeking more information, but that seems unlikely after a revised filing by Walgreens. The FTC would have an additional 30 days to reach a final decision, though the agency could act sooner if it’s satisfied that its concerns have been met.