Posted on Costar.com | January 30, 2017
By Mark Heschmeyer | View Original Article Here
Not having their hopes fulfilled that their $17.2 billion merger would win approval before President Obama left office, Walgreens Boots Alliance Inc. (NASDAQ: WBA) and Rite Aid Corp. (NYSE: RAD) extended their agreement to give new administration officials more time for review.
First proposed in October 2015, the drawn-out approval process is proving costly as Walgreens has agreed to divest additional Rite Aid stores and will now pay far less for Rite Aid.
Under the terms of today’s amendment, Walgreens has agreed to reduce the price for each share of Rite Aid common stock to a maximum of $7 per share and a minimum of $6.50 per share. The original price was $9 per share. The new pricing reduces the value of the merger to between $12.4 billion and $13.4 billion.
In addition, Walgreens Boots Alliance will be required to divest up to 1,200 Rite Aid stores and certain additional related assets if required to obtain regulatory approval.
The exact price per share will be determined based on the number of required store divestitures, with the price set at $7 per share if 1,000 stores or fewer are required for divestiture and at $6.50 per share if 1,200 stores are required for divestiture. If the required divestitures fall between 1,000 and 1,200 stores, then there will be a pro-rata adjustment of the price per share.
The divestiture agreement represents an increase of up to 200 stores over the 1,000 stores that Walgreens had agreed to divest under the terms of the original agreement.
The two drugstore chains now hope to complete their merger by the end of July 2017.
Leading up to this extension, the rumor on Wall Street was that the FTC was unsure about the viability of Walgreens’ plan to offload 865 stores to Fred’s Inc. (NASDAQ: FRED), Garrick Brown, vice president of retail research, Americas for Cushman & Wakefield noted in a research report last week. The question, apparently, has been whether or not Fred’s had the financial capacity to buy the divested stores.
Fred’s signed an agreement in December to purchase 865 stores and certain assets related to store operations for $950 million in cash.
That deal would leapfrog the Memphis-based chain into becoming the country’s third-largest pharmacy operator. It would more than double its store count and triple its annual sales.
Fred’s would also need to invest in the infrastructure necessary to operate these stores, Brown noted.
Fred’s amended its financing for the deal last week to make the option more attractive to regulators. Original financing for the deal had Fred’s enter into a commitment letter for a $1.05 billion asset-backed loan (ABL) and a $600 million term loan, according to Brown.
Under the amended letters, the $1.05 billion ABL will be increased to $1.20billion while the term loan will be decreased by the same amount to $450 million. That change reflects the notion that Fred’s has had to put more assets up as collateral to get their part of the deal done.