Walgreens Boots Alliance; market cap (as of 30/10/2015) $91.3bn
Rite Aid; market cap (as of 30/10/2015) $8.2bn
Introduction
Last week the pharma sector was shook up by a new deal: Walgreens Boots Alliance agreed to buy the smaller pharma rival Rite Aid in a transaction worth $17.2bn. The deal represents the latest move of Stefano Pessina, Walgreens’ Chief Executive, to further expand the company in the distributions in the US and become a global leader.
About Walgreens Boots Alliance
Walgreens Alliance Boots is a US-based pharma company founded in Chicago and headquartered in Deerfield, Illinois. The company, born from the merger between Walgreens and the Swiss company Alliance Boots, is a global pharmacy-led, health and well-being enterprise. The pharma giant is present in more than 25 countries, employs over 370,000 people and has more than 13,100 stores. The company is structured in three main divisions:
- Retail Pharmacy USA: Walgreens and Duane Reade operate within this division. Both businesses sell pharma, fresh foods, household items, beauty and personal care items. They provide customers with convenient, omni-channel access to consumer goods and services, pharmacy, and health and wellness services in communities across America.
- Retail Pharmacy International: Boots represents the principal retail brand within the division. The business is active in eight countries and it is increasing its online presence.
- Pharmaceutical Wholesale: It operates mainly under the Alliance Healthcare brand. The division supplies medicines, healthcare products and related services to more than 140,000 pharmacies, health centers, doctors and it is active in twelve countries.
In April 2015, Walgreens Boots Alliance reported an overall increase in sale of c.35%, to $26.6bn and a 33% rise in profits compared to the past year.
About Rite Aid
Rite Aid, formerly known as Thrift D Discount Center, is a US-based drugstore chain founded in Pennsylvania in 1962. The company mainly sells prescription pharma and other “front-end” products, such as over-the-counter medications, health and beauty aids, personal care items, cosmetics etc. It also offers health coaching, shared decision-making tools and health care analytics but its main business stays within the pharmacy services. The American company is one of the biggest national drugstore chains, with c.4,600 stores and presence in 31 states and the District of Columbia. Rite Aid, employing more than 89,000 people, is the third-largest drugstore in the United States and the largest on the East Coast.
Deal Structure
Walgreens will offer 9$ per Rite Aid’s share in an all-cash transaction, which represents a 48% premium compared to the closing price of the day before the announcement and a 20% premium on the year-on-year stock price. This offer would value Rite Aid’s Enterprise Value at $17.2bn, including $7.4bn of net debt. The transaction would be financed mainly by existing cash ($3bn reported in Walgreens’ last Annual Report) and issuance of new debt. The newly created behemoth would totalize c.$100bn in sales and would rival CVS, Walgreens main competitor, that released sales of $140bn in 2014.
The deal would involve $1bn of synergies that would arise from selling some of the two companies’ locations that are either too close or generating low income and from improving Rite Aid’s sales per selling square foot, a common profitability metric for drug providers.
Selling stores could also arise from antitrust regulators as the combined entity could own 46.5% of the US market share (34.2% detained by Walgreens). The fear regarding the competition has consequently marked the possibility of divesting in certain US regions in which both companies may operate.
Deal Rationale
The deal could bring to Mr. Pessina’s company new advantages over its rival, CVS Health. This 74-year-old CEO of Walgreens Boots Alliance looked for this acquisition as another opportunity to profit from the economies of scale and extend the global reach of his company. Namely, with 8,232 stores in the US only, Walgreens is well ahead of CVS Health having roughly 7,800. With this acquisition, Walgreens will cement its dominance in the US market adding additional 4,561 of Rite Aid’s stores. By adding these stores to their portfolio, Walgreens is using their opportunity to expand in the northeast of the US where their presence is less notable. The stores will continue to operate under existing names in the initial period, subsequently performing complete harmonization of their businesses.
Reform to the Affordable Care Act (Obamacare), which is expected to give another hit to pharmaceutical companies, is arguably the main reason for the deal. Through these policies, the US is seeking to provide more affordable healthcare especially for the low-income families. US Health Industry could be adversely affected having significant price pressures on their products. As a result, Walgreens has joined the consolidation frenzy that is currently going on among pharma companies. The acquisition could be justified with the more bargaining power with respect to suppliers, and economies of scale that could thus be achieved.
The merged company would compete not just with the other pharmaceutical retailers but also with groceries, club stores and health-related services. Namely, Rite Aid is also providing wellness-based products such as organic food and natural products. Their recent $2bn acquisition of Envision Pharmaceutical Services has further increased its pharmacy-benefit management activity, processing prescriptions to insurance companies or corporations increasing its pricing power on drug makers and pharmacies.
Moreover, this deal would finally give the Walgreens Boots Alliance the grasp on Rite Aid’s health insurance business. Thus, Mr. Pessina has clearly seen this deal as a great opportunity for expansion of its business.
Market reaction
After the announcement, the shares of Walgreens rose 6.4% while the Rite Aid’s shares jumped to $8.67 marking a significant 43% increase. However, both prices depressed soon after, signaling the investors’ caution in the possible competition issues regarding this deal. The transaction is expected to close in the second half of 2016.
Financial Advisors
Walgreens Boots Alliance was advised by UBS Investment Bank that also provided bridge financing for this deal, while Citigroup served as an advisor for Rite Aid.
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