How does the agreement benefit Walgreens?
As we’ve discussed in this series, Walgreens received FTC (Federal Trade Commission) approval to acquire 1,932 Rite Aid store on September 19. Buying Rite Aid stores should help Walgreens better compete with America’s largest retail pharmacy chain, CVS Health (CVS). The deal could also improve Walgreens’s physical reach across the United States—especially in the Northeast—and increase its total store count by around 24%. Walgreens currently operates around 8,200 stores across the country.
“Combining Walgreens retail pharmacy network with a strong portfolio of Rite Aid locations is expected to help us achieve enhanced, sustainable growth while enabling us to broaden our reach and provide greater access to convenient, affordable care in more local neighborhoods across the United States,” said Walgreens Boots Alliance executive vice chairman and CEO Stefano Pessina.
Walgreens management expects to realize $300 million in annual synergies over the next four years. However, the company doesn’t expect the transaction to have a significant impact on the current fiscal year’s earnings per share. (The fiscal year ends on August 31, 2018.)
What does Rite Aid get?
Rite Aid gets the much-needed cash to repair its debt-heavy balance sheet. The company can also choose to invest in its remaining business.
Also, as part of the deal, Rite Aid receives an option to become a member of Walgreens Boots Alliance Development GmbH, Walgreens’s group purchasing organization. Rite Aid can exercise the option through May 2019.
ETF investors seeking to add exposure to WBA or RAD could consider the SPDR S&P Retail ETF (XRT), which invests 2.5% of its combined portfolio in the two companies.