UPDATE 3-Walgreens scraps Rite Aid takeover, to buy half its stores

* To buy 2,186 Rite Aid stores, 3 distribution centers

* New deal valued at $5.18 bln

WBA shares rise 5 pct, RAD and Fred's shares fall 20 pct (Adds comments from analysts, Rite Aid CEO; updates shares)

By Siddharth Cavale

June 29 (Reuters) - Drugstore chain Walgreens Boots Alliance Inc said it ended its deal to buy Rite Aid Corp after struggling to win antitrust approval, and that it would instead buy nearly half of the smaller rival's U.S. stores for $5.18 billion.

Walgreens also said on Thursday it ended a related deal to sell as many as 1,200 Rite Aid stores to Fred's Inc, sending Fred's shares down 20 percent in premarket trading.

Rite Aid's shares plunged 22 percent to $3.07, while Walgreens shares were up 5 percent at $81.02.

The previous $9.5 billion deal, announced in October 2015, faced tough antitrust scrutiny as regulators deliberated over the effects of a merger between the No. 1 and No. 3 drug store chains in the United States would have on competition.

Reuters reported last month that the Federal Trade Commission (FTC) staff had asked the two companies and groups concerned about the deal for information that could be used in a lawsuit aimed at blocking it.

"Walgreens and Rite Aid have taken a pragmatic approach," said Neil Saunders, managing director of market research firm GlobalData Retail.

The new deal makes it easier for the companies to gain regulatory approval as it avoids weakening competition in some markets and leaves Rite Aid as a viable player in the pharmacy space, Saunders said.

The FTC said on Thursday it would review the new proposal.


The companies had altered the terms of the previous deal in January in a bid to speed up the regulatory approval process. Walgreens had said it would divest more Rite Aid stores than previously proposed and reduced the offer price to $6.50-$7.00 per share, from $9.00 per share.

Leerink Partners analyst David Larsen estimated that under the new deal, Walgreens would be paying $2.4 million per Rite Aid store, higher than what it would have paid under the January agreement, where it would have paid $2.04 million to $2.06 million per store.

Walgreens said on Thursday it expects the new deal to close within six months, after which it will begin buying the 2,186 Rite Aid stores.

Walgreens also reported better-than-expected profit and sales for the third quarter, helped by a rise in prescription volumes in its pharmacy business in the United States.

The company also authorized a $5 billion buyback program and raised the lower end of its full-year profit forecast by 8 cents per share to a range of $4.98 to $5.08.

Analysts on average were expecting full-year profit of $4.96 per share, according to Thomson Reuters I/B/E/S.

Rite Aid, which had nearly 4,600 stores in the United States as of May, said the stores included in the deal are primarily located in the Northeast, Mid-Atlantic and Southeast.

The deal also consists of three distribution centers located in Connecticut, Philadelphia and South Carolina.

The new agreement will assist Rite Aid in addressing pharmacy margin challenges and in significantly reducing debt, the company's CEO John Standley said in a statement.

Walgreens said it expects the new deal to modestly add to adjusted earnings per share in the first full year after close and generate savings of more than $400 million.

The company said it would pay Rite Aid a $325 million termination fee.

(Reporting by Siddharth Cavale in Bengaluru; Editing by Sriraj Kalluvila)