Hot Rumor: Will Walgreens acquire Rite Aid?

An interesting rumor to be sure.   Walgreens has never been as aggressive on acquisitions as CVS has, but acquiring Rite-Aid would be a major coup and blow them past CVS in store size and sales.   More importantly, they would also gain power for its PBM side of the business and make them a major force to be reckoned with for Caremark.

  There have been a ton of rumors about chains buying all or part of Rite-Aid over the years (including Longs) so this should be taken with a grain of salt but if it does come to pass, there will be one less giant in the chain drug store market.

Walgreens, once known for growing the organic way, may be looking to add stores in the U.S. through acquisition, this based on a statement made to Reuters a couple of weeks back by Stefano Pessina, acting CEO of Walgreens Boots. The speculation is that Rite Aid, the third largest drugstore chain in the U.S., may be the top target.

Mr. Pessina said the likelihood of a deal in the U.S. is greater because of the size of the market and because of opportunities opening up for drugstores as a result of the implementation of the Affordable Care Act.

Speculation of a possible deal has focused on Rite Aid because of its size, improving performance and a recent deal to acquire Envision Pharmaceutical, a full service pharmacy benefits manager (PBM). Rite Aid has benefited as the chain’s share price has risen along with the gossip.

Walgreens, which has been at loggerheads with Express Scripts over reimbursement rates, would be able to put more pressure on the PBM if it acquired Rite Aid because of its increased purchasing power and connection to its Envision.

Former Walgreens CEO Jeff Rein said the chain may be interested in acquiring its smaller rival, particularly if it is not able to come to an agreement with Express Scripts. Mr. Rein told Credit Suisse analyst Edward Kelly, Walgreens was “a little more eager and willing to do deals than in the past.”

Mr. Kelly estimates that a merger between the two drugstore chains would result in cost savings of between $400 million and $650 million. He believes Walgreens would need to divest more than three percent of its stores to get the approval of the Federal Trade Commission.

According to a New York Times DealBook report, the combination of the two chains would result in the combined company having a 46 percent market share in the New York metro market and 37 percent in Los Angeles.

The deal, if approved, would have downsides, including increased borrowing costs for Walgreens Boots as its credit rating fell. The company would also have to deal with stores represented by unions. Thirty-percent of Rite Aid’s workforce currently belongs to a union.