Walgreens deal for Rite Aid deal likely to succeed
The Wall Street Journal report that Walgreen Boots Alliance is in talks to acquire Rite Aid makes sense, even with antitrust concerns.
This is all about cost savings. The Affordable Care Act is putting pressure on companies to lower costs. Faced with ever-higher drug prices, pharmacy benefit managers are pushing back against both the pharmaceutical companies and the retail drugstore chains. If they can't get them to lower prices, they will force their beneficiaries (that's you and me) to pay a higher portion of the costs.
If you're a Walgreens or Rite Aid or CVS, you want to get bigger so that at least no one can simply cut you out of a deal.
What about antitrust issues? Given that the three main drugstore chains control a good portion of the retail business, you would think there would be some antitrust issues, and like the Anheuser-Bush InBev and SABMiller, it seems there would be some divestiture where there is significant overlap.
But closer inspection reveals that Rite Aid is significantly smaller than its rivals:
Retail pharmacy stores
Walgreens 8,200 in 50 states
CVS 7,800 in 44 states
Rite Aid 4,600 in 31 states
Vishnu Lekraj, an analyst at Morningstar, thinks the deal would make sense, since it has a large presence in only a few regions (parts of the northeast, for example), making antitrust issues manageable.
Also, Lekraj notes that the retail drug space has seen notably increased competition, everything from Wal-Mart to Target to Kroger and even small local grocery stores, greatly diminishing the chances that antitrust alone would blow up the deal.
Richard Evans, analyst at Sector & Sovereign Research, estimates that Walgreens would only have to divest 9.9 percent of the acquired Rite Aid stores.
As for other winners and losers, pharmacy benefits manager McKesson would be a loser, since it has a relationship with Rite Aid but not Walgreens or CVS. Express Scripts also has a relationship with Rite Aid that would be hurt, but the stock is also down because they were rumored to be an acquisition target of Walgreens. AmeriSourceBergen is partly owned by Walgreens and would be a beneficiary of the deal.