Rite Aid

Fred’s Inc.’s agreement to purchase 865 Rite Aid stores not only helps clear the path for Walgreens Boots Alliance Inc.’s acquisition of Rite Aid Corp., but also could help Fred’s expand more deeply into the profitable beauty category.

Walgreens, which merged with Alliance Boots two years ago, said it would buy Rite Aid for $9.4 billion in October 2015. But the U.S. Federal Trade Commission put that deal under the microscope, and Walgreens unveiled in September that it would need to divest between 500 and 1,000 stores in order to execute the transaction. Divesting the stores may pave the for WBA to finalize the merger, which is expected in early 2017. Rite Aid’s store count totals nearly 4,600 stores in 31 states and the District of Columbia.

Fred’s, based in Memphis, currently operates 647 stores in 15 states with 371 of those operating full service pharmacies. The stores are best described as a hybrid of discount dollar stores, drugstores and other discount stores. The addition of the Rite Aid stores would push Fred’s to the third-largest drugstore chain, with a door count of 1,512, propelling it into a major competitor with the nation’s drug and discount chains. It also gives a green light for growth into other markets where Rite Aid operates.

The $950 million all-cash transaction is subject to Federal Trade Commission approval, as well as the completion of the pending acquisition of Rite Aid by WBA.

Fred’s will continue to operate the Rite Aid stores under the Rite Aid banner during a 24-month transition period, and employ store associates until the deal is closed.  Fred’s will have a significant presence in the South, as well as East and West Coasts once the transaction closes. The possibility also exists that Fred’s could wind up with even more locations if the FTC requires Walgreens and Rite Aid to make further divestments in order to complete their merger. The stores that Fred’s is buying are “generally representative” of Rite Aid’s general store performance, according to the company.

“This will be a transformative event for Fred’s Pharmacy that will accelerate our health care growth strategy through our acquisition of 865 new stores located in highly attractive markets,” said Fred’s chief executive officer Mike Bloom in a statement. “We believe that this transaction will also create tremendous opportunities for both our new and existing front-of-store and pharmacy team members.”

That front of store potential could include trumped up beauty assortments, especially since Rite Aid has elevated its offer over the past five years. And, Fred’s under Bloom, who joined the company in January 2015, has the pedigree to boost beauty. With his background in the drugstore business, including a major role building beauty at CVS and Peoples Drug Bloom, he is well-known in the business to value the people-pulling power of cosmetics and health and beauty aids. He also courted many beauty brands to Family Dollar where he was president and chief operating officer prior to joining Fred’s.

The current assortment at Fred’s includes key brands such as L’Oreal, Cover Girl, Neutrogena and SinfulColors. The beauty items in its holiday circular include a makeup brush set priced at $8, an LA Colors Gift set at $5, Coty stocking stuffer fragrances tagged at $3.99, and Beyoncé Pulse fragrance gift set for $15.99. Just because Fred’s is a value retailer, it doesn’t pass up hot beauty trends such as a Profusion Brow Kit, priced at $7.

Fred’s could provide additional doors for beauty brands hungry for expansion as the mass business has consolidated. Industry expert Allan Mottus agreed there is fertile territory. “Once Fred’s assumes control of the store it will be able to mine the high-level of merchandising established by Judy Wray [Rite Aid’s category manager]. “If so, it should do remarkably well.”

Bank of America Merrill Lynch was Walgreens’ financial adviser, with Sidley Austin LLP as legal counsel for deal-related issues and Weil Gotshal & Manges LLP as the legal team for regulatory matters. Citi is providing financial advice to Rite Aid, with Skadden Arps Slate Meagher & Flom LLP as legal counsel for transaction matters and Jones Day as counsel for the regulatory side. A. T. Kearney was strategic adviser to Fred’s ceo and board of directors. BofA Merrill Lynch and Regions Bank committed financing to Fred’s for the transaction, and Peter J. Solomon Co. LLC handled the fairness opinion.