Walgreens & Rite Aid Agree on Store Divestiture Plan

DEERFIELD, Ill. And CAMP HILL, Pa. — Following recent media reports that the pending merger between drugstore chains Walgreens Boots Alliance and Rite Aid Corp. may close before the end of 2016, the two companies have entered a divestiture plan to sell 865 Rite Aid stores and certain assets related to store operations to Fred's Inc.

The $950-million all-cash transaction is subject to Federal Trade Commission (FTC) approval, the approval and completion of the pending acquisition of Rite Aid by Walgreens Boots Alliance and other customary closing conditions.

The agreement is in direct response to the FTC's concerns in its review of the proposed acquisition of Rite Aid by Walgreens Boots Alliance, which was announced in October 2015. If approved, the proposed divestiture transaction would establish Fred's Pharmacy as one of the largest drugstore chains in the United States, with significant presence in the South, East and West coasts.

Under the terms of the purchase agreement, Fred's Pharmacy would acquire 865 Rite Aid stores and certain assets related to store operations. The company expects to continue to employ all store associates and certain field and regional associates related to the operations of the acquired stores upon completion of the transaction.

Fred's Pharmacy would also continue to operate the acquired stores under the Rite Aid banner during a transition period. If the FTC requires divestiture of more than the 865 Rite Aid stores currently contemplated by the purchase agreement, and Walgreens Boots Alliance agrees to sell the stores, the agreement requires Fred's to purchase the additional stores.

Memphis, Tenn.-based Fred's — which operates 647 discount general merchandise stores, including 18 franchised locations, primarily in the Southeastern United States — sparked heightened interest in the investor community when its management suggested a "pending transaction" was in the works, CSNews Online previously reported.

"This will be a transformative event for Fred's Pharmacy that will accelerate our healthcare growth strategy through our acquisition of 865 new stores located in highly attractive markets. We believe that this transaction will also create tremendous opportunities for both our new and existing front of store and pharmacy team members," said Michael K. Bloom, CEO, Fred's Pharmacy. "We look forward to realizing the considerable benefits this transaction will bring to our customers, patients, payors, supplier partners, team members and shareholders."

Deerfield, Ill.-based Walgreens' acquisition of Camp Hill, Pa.-based Rite Aid is valued at approximately $17.2 billion, including acquired net debt, and would fuse the nation's largest and third-largest drugstore chains. The total number of stores controlled by Walgreens could increase to more than 12,000, and would give the combined company increased negotiating power with drugmakers and suppliers. The deal is expected to close early next year.

"We are pleased to have found an experienced pharmacy operator for these stores," said Walgreens Boots Alliance Executive Vice Chairman and CEO Stefano Pessina. "With this agreement, we are moving ahead with important work necessary to obtain approval of our acquisition of Rite Aid. We look forward to continuing to provide our customers and patients with the highest level of care and attention."

BofA Merrill Lynch acted as Walgreens Boots Alliance's financial adviser, with Sidley Austin LLP acting as its legal counsel on transaction legal matters and Weil, Gotshal & Manges LLP acting as its legal counsel on antitrust regulatory matters.

Citi acted as Rite Aid's exclusive financial adviser, with Skadden, Arps, Slate, Meagher & Flom LLP acting as its legal counsel on transaction legal matters, and Jones Day acting as its legal counsel on antitrust regulatory matters.