Little Fish in the Big Pond

Little Fish Big Pond

Little Fish Big Pond

 

Why watch reality television when you get all the drama you want from the business section of the newspaper? The Walgreens Boost acquisition of Rite-Aid has been delayed for over half a year while waiting for regulatory approval. Back in July, the two mega-pharmacies owned a combined 13,000 stores. Most of the debate over approval hinged on how many of those stores needed to be sold.[1]

 

Since the summer talks, the $9.4 billion deal has faced resistance. The main one being little interest in purchasing the 650 Walgreen locations put up for sale (over half the required 1,000 locations the FTC required sold or closed.)[2] No one wanted to buy these locations because what hope would their business have in a world competing with CVS and a Walgreens Rite-Aid merger?

 

Well, just before the year came to a close, a business answered the call. Fred’s, a small chain in Tennessee, with 648 locations (370 are full service pharmacies) and under $6 million in cash, managed to secure $1.65 billion in borrowings to purchase 865 Rite-Aid stores.[3] While this deal will make Fred’s a national brand, does the company have a chance to compete? With around 1500 locations they’re still miniscule compared to the giants they bought from.

 

This deal leaves Walgreens and Rite-Aid hopeful that they will move past antitrust regulators but the question is, are the regulators doing their job? Walgreens already had a mutli-continental merger one year ago with Alliance Boosts from Switzerland.[4]

 

The FTC has fought a number of similar deals like Staples-Office Depot, and Haliburton-Baker Hughes. Now the they’re possibly allowing the largest and third largest pharmacies to merge. What these mega-stores are able to do is undercut competition with low prices until they can’t afford their costs and have to either sell or close. Then once the plain is cleared they can artificially cut back supply and raise prices leaving consumers defenseless.

 

Views expressed are the opinions of Jeffrey Goldfarb and the Financial Advisors at Goldfarb Financial and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.

 

[1] http://www.investors.com/news/walgreens-reportedly-in-talks-about-divestitures-for-rite-aid-deal/

[2] http://www.investopedia.com/news/seeking-buyer-650-walgreens-stores-wba/?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186

[3] http://www.forbes.com/sites/brucejapsen/2016/12/20/walgreens-rite-aid-divest-850-stores-to-freds-pharmacy-for-850m/#75c4988a5b26

[4] http://fortune.com/2016/12/20/walgreens-rite-aid-freds-pharmacy-merger/

 

  

little fish big pond