(Bloomberg) — Walgreens Boots Alliance Inc. (NYSE:WBA) agreed to acquire Rite Aid Corp. (NYSE:RAD) for about $9.4 billion in cash in a transaction to further expand the company's role in the distribution of medications in the U.S.
The Rite Aid transaction, announced Tuesday, would combine the second-and third-largest drugstore chains in the United States, with a total of about 12,800 locations, helping Walgreens vault past market leader CVS Health Corp. (NYSE:CVS). The acquisition will add to Walgreens' earnings beginning a full year after completion and will produce more than $1 billion in savings from cost overlaps, the companies said Tuesday in a statement. Including debt, the deal is valued at $17.2 billion, they said.
The company also reported fiscal fourth-quarter earnings showed how it reaps cost savings from mergers. Walgreens said it has saved $799 million in fiscal 2015 after combining with Alliance Boots GmbH last year.
Rite Aid shares fell 8.2 percent to $7.96 in early trading Wednesday, below Walgreens' offer of $9 a share, reflecting speculation that the transaction will face antitrust scrutiny. They had risen as high as $8.74 earlier after the Wall Street Journal reported the companies were close to a deal. Walgreens shares rose 1.4 percent to $96.50.
Deal opportunity
Rite Aid's stock had slumped 29 percent since Sept. 16, after the company lowered profit and revenue forecasts for the year, giving Walgreens a potential opportunity to make an offer. The price represents a 48 percent premium to Rite Aid's closing price on Monday.
Speculation that Walgreens would pursue Rite Aid rose to a crescendo in March after billionaire Stefano Pessina, who took over in January as interim chief executive officer at Walgreens after it acquired Alliance Boots, said he envisioned doing his next big deal in the United States.
Pharmacy benefits
In addition to expanding its drugstore locations, the Rite Aid deal gives Walgreens its first foray into the business of managing drug benefits for insurers and employers as a pharmacy benefits manager (PBM), an area where rival CVS is a leader. Rite Aid entered that business by acquiring Envision Pharmaceutical Services Inc. for about $2 billion this year.
If Walgreens aims to get bigger in drug-benefit management, it could use EnvisionRX to acquire other small competitors to build that business, said Ross Muken, an analyst at Evercore ISI who advises holding the shares.
Rite Aid CEO John Standley is eligible to receive $23.4 million if he's terminated after the deal, according to data compiled by Bloomberg based on Walgreens' offer price per share.
Shares of drug distributor McKesson Corp. dropped 4.2 percent, while AmerisourceBergen Corp., Walgreens' distribution partner for medications, jumped 4.2 percent. Rite Aid represents about $18 billion of McKesson's revenue, according to Evercore ISI.
