Walgreens Boots Alliance executive vice chairman and chief executive officer Stefano Pessina has made good on his longstanding assertion that the U.S. is a happy hunting ground for acquisitions as the mass retail market undergoes consolidation. Presumably, he remains open to further opportunity following Tuesday’s $17.2 billion deal to buy rival Rite Aid.
Yesterday WBA entered into a definitive agreement to acquire all outstanding shares of Rite Aid for $9 per share in cash for a total value of approximately $17.2 billion, including acquired debt. As stated previously, the purchase price alone amounts to about $9.4 billion. Rite Aid has long been mentioned as an acquisition target for WBA, which appeared to be waiting for the right time.
The deal is expected to close by the second half of next year. The transaction is expected to be accretive to Walgreens Boots Alliance’s adjusted earnings per share in its first full year after closing.
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Together, the two chains operate more than 13,000 stores, although industry sources expect WBA will close or sell off some doors in overlapping markets or those that are underperforming.
“This accelerates our long-term objective to strengthen our presences across the U.S.,” said Pessina during the earnings call Wednesday morning. “This combination will generate a stronger base for sustainable growth and investment into Rite Aid stores, while realizing synergies over time.”
That will require some investment. Standard & Poor’s Jim Henry said in a report that about two-thirds of Rite Aid’s stores haven’t been renovated in years and will need resources to update.
Walgreens executives said the company wants to cut at least $1 billion in expenses out of Rite Aid.
Walgreen’s wants to spur sales growth in the front end of its stores, where beauty is merchandised. That product category is a core of WBA and is also a strong department at Rite Aid,which has elevated customer experience in its stores with curated beauty lines and greater levels of service. WBA’s strong beauty lineup includes No7, Botanics, Soap & Glory and Liz Earle, which it purchased earlier this year. The company is imprinting more of its beauty departments with Boots brands and signage. In particular, the company singles out robust growth of No7, which just celebrated its 80th anniversary.
The deal was announced the night before WBA presented its fiscal 2015 and fourth-quarter results — the first from the combination of Walgreens and Alliance Boots which merged last December.
Net sales in fiscal year 2015 increased 35.4 percent to $103.4 billion compared with the same period a year ago. The Retail Pharmacy USA division, whose principal retail pharmacy brands are Walgreens and Duane Reade, had fiscal year 2015 total sales of $81 billion, an increase of 6 percent over the previous fiscal year. Adjusted fiscal year 2015 net earnings attributable to Walgreens Boots Alliance increase 28.9 percent to $4.1 billion, compared with the year-ago period. GAAP net earnings attributable to Walgreens Boots Alliance increased 118.4 percent to $4.2 billion. Pessina credited the progress made, while acknowledging, “we have much work to do and operate in some challenging markets.”
Upon completion of the merger, Rite Aid will be a wholly owned subsidiary of WBA and is expected to initially operate under its existing logo. When Walgreens bought Duane Reade in 2010, it maintained the name virtually synonymous with drugstores (although the pharmacy has Walgreens branding) in New York City. But in the case of its purchase of Newark, Del.-based Happy Harry’s, Walgreens eventually converted the stores to its own nameplate.
With the acquisition, competition between the top two chains, Walgreens and CVS, intensifies. CVS had 2014 sales of $139.4 billion, with about $68 billion of that produced by retail operations. Rite Aid produced revenues of $26.5 billion in its fiscal year ended in February 2015.
The next largest North American drugstore player is Shoppers Drug Mart in Canada with estimated sales of $9 billion, followed by Health Mart, a drug coop, with volume of about $8.5 billion. Drugstores face stepped up competition at the pharmacy counter from discounters and supermarkets. Wal-Mart, for example, has more than 4,500 pharmacies while Kroger maintains more than 2,100.