* Walgreens to buy 2,186 Rite Aid stores, 3 distribution centers
* New deal valued at $5.18 bln
Walgreens shares rise, Rite Aid and Fred's shares fall (Adds antitrust comment, updates share prices)
By Siddharth Cavale
June 29 (Reuters) - Drugstore chain Walgreens Boots Alliance Inc scrapped its deal to buy Rite Aid Corp after failing to win antitrust approval, but said it would instead buy nearly half of the smaller rival's U.S. stores for $5.18 billion.
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, said Neil Saunders, managing director of market research firm GlobalData Retail.
"Walgreens and Rite Aid have taken a pragmatic approach," said Saunders.
Walgreens on Thursday also ended a related deal to sell as many as 1,200 Rite Aid stores to Fred's Inc, sending Fred's shares down 17 percent in mid-morning trade.
Rite Aid's shares plunged 25 percent to $2.93, while Walgreens shares were up slightly at $77.33.
Walgreens, the biggest drugstore chain, had said in October 2015 that it would buy No. 3 Rite Aid for $9.5 billion. They decided to end the deal after the Federal Trade Commission said it would not give the deal antitrust approval, Walgreens said in a press statement.
Rite Aid, which had nearly 4,600 stores in the United States as of May, said the stores to be sold are mainly in the Northeast, Mid-Atlantic and Southeast. The deal also includes distribution centers in Connecticut, Philadelphia and South Carolina.
The decision to sell 2,186 Rite Aid stores will weaken the chain and could still be controversial, said David Balto, an antitrust lawyer who had worked with groups opposing Walgreens takeover of Rite Aid.
"Rite Aid's future is going to be bleak after they sell these stores. This is still going to raise some serious questions. It's still taking out a major competitor," Balto said.
The FTC said on Thursday it would review the new proposal.
The agency sued to stop two deals last week, suggesting that the tough antitrust approach taken by the previous Obama administration continued under President Donald Trump.
That said, the agency is currently run by Acting Chairwoman Maureen Ohlhausen while the head of competition, Tad Lipsky, is also in an acting role. Trump must name three more commissioners for the FTC.
Walgreens and RiteAid had altered the terms of the previous deal in January in a bid to win approval. Walgreens had said it would divest more Rite Aid stores than previously proposed and reduced the offer price to $6.50-$7 per share, from $9 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.
Walgreens also reported better-than-expected profit and sales for the third quarter, helped by a rise in prescription volumes in its U.S. pharmacy business.
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.
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 the 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; Additional reporting by Diane Bartz in Washington, DC; Editing by Sriraj Kalluvila, Bernard Orr)