Walgreens has been attempting to merge with competitor Rite Aid since October 2015, but antitrust concerns caused the deal to fall apart mere hours before the federal government was scheduled to issue a decision on the matter. Due to heavy scrutiny from antitrust regulators, it was widely believed that the government was not going to approve the merger.
What Happens Now?
With the full merger off, Walgreens will be required to pay Rite Aid a cancellation fee of $325 million. On the plus side, analysts believe the company will recover this loss, plus $75 million, during the next four years as a result of the company’s store purchases.
Rite Aid will have the option to continue competing with Walgreens and CVS, but the company will have to do so with only 52 percent of their current stores. The new deal between the two drug store giants will give Walgreens 2,186 of their competitor’s locations.
Walgreens will pay $5.2 billion for these acquisitions instead of the $9.4 billion they offered in exchange for a complete merger. This figure was already significantly less than the $17.2 billion offer that was originally on the table back in October 2015.
Why Did the Deal Fall Apart?
If Rite Aid had completely merged with Walgreens, this would have left only two major drug store chains left nationwide. Federal regulators appeared poised to kill the deal as a result, regardless of the fact that the merger had been in process for almost two years.
Part of the issue stems from a high-profile deal that regulators approved in 2015 between Safeway, Albertsons and Haggen Holdings. Haggen’s end of the deal was to purchase 168 stores, but they ended up filing for bankruptcy just a few months later.
How Will This Impact the Stock Market?
By changing course at the last minute, Walgreens may have protected investors by preventing the company’s stock from plummeting. Last night, Rite Aid’s stock dropped an astounding 17 percent.
Meanwhile, the 4.3 percent increase that Walgreens experienced yesterday is rapidly disappearing due to the merger failing, but the drug store chain’s acquisition of almost 2,200 new stores should help them bounce back after the market corrects itself.
Unfortunately, smaller drug store company Fred’s, which was expected to purchase 865 Rite Aid stores as part of the Walgreens merger, has taken a huge stock hit. It’s unclear what the next move is for Fred’s, but they will receive a $25 million merger termination fee.
Ultimately, consumers are likely to still have just as many drug store location choices as they always have. The only major difference is that some stores that would have switched to Walgreens will stay branded as Rite Aid, at least for the foreseeable future.
[Featured Image by Matt Rourke/ AP Images]