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From Antitrust Law Daily, June 29, 2017

Walgreens, Rite Aid pull HSR filing, resetting clock for FTC review of modified deal

By Peter Reap, J.D., LL.M.

Walgreens Boots Alliance and Rite Aid Corporation today announced a new agreement that the parties hope will get the blessing of the FTC. Walgreens Boots Alliance will acquire 2,186 stores, three distribution centers and related inventory from Rite Aid. This latest merger agreement replaces earlier proposals that apparently could not win FTC approval.

The previous merger agreement with Rite Aid was announced in October 2015 and was amended in January 2017. An agreement to divest certain Rite Aid stores to Fred's, Inc. was announced in December 2016. Both of these agreements have been terminated, the companies’ prior filings under the Hart-Scott-Rodino (HSR) Act voluntarily withdrawn, and Walgreens Boots Alliance will pay Rite Aid the $325 million termination fee with respect to their merger agreement.

The consideration for the new transaction will be $5.175 billion in cash, the assumption by Walgreens Boots Alliance of the related real estate leases and the grant of an option to Rite Aid, exercisable through May 2019 and subject to certain conditions, to become a member of Walgreens Boots Alliance's group purchasing organization, Walgreens Boots Alliance Development GmbH. Walgreens Boots Alliance will also assume certain limited store-related liabilities as part of the new transaction.

Tad Lipsky, Acting Director of the FTC Bureau of Competition, issued the following statement on this morning’s announcement regarding the new proposal from the drug store chains:

"The Commission staff thoroughly investigated the potential impact that the proposed Walgreens/Rite Aid merger may have had on competition and evaluated a number of divestiture proposals put forward by the parties. Before the time the companies would have been free to close their transaction absent Commission action, they voluntarily withdrew their HSR filings, and the matter is no longer before the Commission. Walgreens and Rite Aid have publicly stated they have reached a new agreement relating to certain Rite Aid assets. The FTC will review any new transaction proposed by the parties under the statutes enforced by the Commission, as may be applicable."

The decision to terminate the merger agreement follows feedback received from the FTC that led the companies to believe that they would not have obtained FTC clearance to consummate the merger, Rite Aid announced. "While we believe that pursuing the merger with WBA was the right thing to do for our investors and customers, this new agreement provides a clear path forward and positions Rite Aid as a strong, independent, multi-regional drugstore chain and pharmacy benefits manager with a compelling footprint in key markets," said Rite Aid Chairman and CEO John Standley.

The new transaction resets the clock for FTC review and is subject to the expiration or termination of applicable waiting periods under the HSR Act, and other customary closing conditions. The initial closing of the new transaction is expected to occur within the next six months, according to Walgreens Boots Alliance.

The new transaction ends the previous plan to take over the nearly 4,600-store Rite Aid chain, along with a related deal to sell as many as 1,200 Rite Aid stores to Fred's Inc. Instead, Walgreens Boots Alliance will buy nearly half of the smaller rival's U.S. stores. Walgreens Boots Alliance expects the new transaction to be modestly accretive to its adjusted diluted net earnings per share in the first full year after the initial closing of the new transaction, and expects to realize synergies from the new transaction in excess of $400 million. These synergies are expected to be fully realized within three to four years of the initial closing and derived primarily from procurement, cost savings and other operational matters.

"This new transaction extends our growth strategy and offers additional operational and financial benefits," said Walgreens Boots Alliance Executive Vice Chairman and CEO Stefano Pessina. "It will allow us to expand and optimize our retail pharmacy network in key markets in the U.S., including the Northeast, and provide customers and patients with greater access to convenient, affordable care. We believe this new transaction addresses competitive concerns previously raised with respect to the prior transaction and will streamline and simplify the transition for customers, team members and other stakeholders."

Companies: Walgreens Boots Alliance; Rite Aid Corp.

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