Could Walgreens be in the process of lowering the price of the divested stores to gain FTC approval of Walgreens's (NASDAQ:WBA) acquisition of Rite-Aid (NYSE:RAD)? Two comments made in the most recent conference calls of Walgreens and Fred's (NASDAQ:FRED) suggest that this might be possible.
On April 5, 2017, Stefano Pessina, Executive Vice Chairman and CEO of Walgreens Boots Alliance, Inc., said that the January changes to the deal allow "us the ability to address any reasonable demand that may be made of us in obtaining regulatory approval." He was referring to the agreement with Rite-Aid in January, which saw Walgreen's purchase price reduced by $2 billion, while still receiving another close to $1 billion from Fred's for the divested stores. As a result, he seems to be saying that Walgreens would be willing to accept any demand from the FTC costing up to $3 billion to make the deal happen.
On April 6, 2017, Rick J. Hans, CFO, EVP and Secretary of Fred's, Inc., said that the beauty of the deal was that the due to collateral in the assets Fred's was purchasing, Fred's could receive financing that would provide these stores with less leverage than the current Rite Aid and allow Fred's "to reinvest in stores to make them very competitive in their individual markets." In other words, Mr. Hans was suggesting that due to the low purchase price, Fred's could borrow enough money to cover the purchase price, reinvest in the stores, and still not incur as much debt as Rite-Aid currently has per store.
If Mr. Pessina is willing to spend up to $3 billion to make the deal happen, and if Mr. Hans can lower the leverage and increase the competitiveness of Rite-Aid stores with a purchase price of $1 billion, would it not make sense for Mr. Pessina to lower the price even more and make the divested stores even more competitive in the eyes of the FTC. With $3 billion available, Mr. Pessina can easily forgo the $1 billion for the stores and simply transfer them to Fred's freed of any debt. In addition, Mr. Pessina can even provide additional financing for investment in the stores. In other words, it is hard to see how $3 billion cannot make this deal attractive to the FTC.
The New York Post has repeatedly reported that the FTC is concerned about the close to $1 billion Fred's would be required to pay for the 900-1200 stores it would receive. The FTC is apparently afraid the heavy debt load would cause Fred's to raise prices or even eventually go bankrupt. Articles in the New York Post and Bloomberg often cite the FTC's experience with Albertsons Cos. takeover of Safeway Inc. and Hertz Global Holdings Inc.'s acquisition of Dollar Thrifty Automotive Group Inc. In both of the these cases the FTC-approved buyers went out of business.
Since Rite-Aid shareholders have already taken the hit for the $3 billion, all other stakeholders and the FTC benefit from a lower purchase price for divested stores. Walgreens finally gets the deal to close with the divestiture paid for by Rite-Aid shareholders. Fred's gets to expand nationwide with 1,200 additional stores that are debt free. The FTC has ensured competition to Walgreens and CVS nationwide and has removed $7.3 billion in debt from all of the 4,500 Rite-Aid stores that can potentially translate into lower prices for customers.
Disclosure: I am/we are long FRED.
Additional disclosure: I formerly held RAD.