Walgreen Co's (WAG) desire to increase market share and Rite Aid Corp's (NYSE:RAD) poor capital structure have led some to speculate an acquisition may occur at some point in the future. One of the major considerations in evaluating a takeover in this space is store overlap. The following is an analysis of the two store's footprints across the U.S. with a focus on population per store by state for each company and a hypothetical combined company. This analysis is not meant to be exhaustive or definitive, but rather to discover where potential problem areas may be. In order to determine how many stores is really too many, a market-by-market and store-by-store analysis would need to be done which would include all the local competitors not just Walgreen and Rite Aid.
The following table shows the store footprints, and state population per store for each entity and for the combined companies:
The table has been sorted by combined company population per store with states below the national average highlighted in red. Those highlighted in red are not automatically red flags by any means; rather it is a place where we can start the analysis since those not highlighted are likely of lesser concern.
Within this group, we can see there are three states with no Rite Aid stores which is useful because it gives a benchmark for an acceptable concentration. Illinois and Florida on average have about 21,800 individuals per store. If we look at states where the store concentration is 10% greater than this level, we are left with all the states above Kentucky in the table. A few of these states are likely of little concern because there is not great overlap; for example, Maine, West Virginia, Vermont and Pennsylvania. If we exclude these states we are left with 1,647 potentially problematic (either from a regulatory or business case point of view) stores or about 36% of the total. Of this amount, it is difficult to say how many stores are in actuality problematic - perhaps it is 20% in some states and 40% in others.
Even in California, a state with no great overlap, there are Rite Aid stores within walking distance of Walgreen stores in certain areas from my experience. If we use 35% as a guidepost for Rite Aid's with a Walgreen in close proximity in the most problematic states then there are potentially 575 stores that would need to be considered. There is likely a second set of states where the percentage is in the 10-15% range, or 200-300 stores, and then the states with no overlap where there are no problems. In total this may mean something on the order of 800-900 stores would be of concern or a little under 20% of the total.
It is also useful to look at problematic states specifically. Of the larger states, New York, New Jersey, Michigan and Massachusetts all appear to have significant amount of overlap and relatively high concentrations. These four states and four other smaller states with large overlap have 1,564 stores. New York is especially interesting because of Walgreen's recent purchase of a New York focused chain in that state which shifted it from a likely non-problematic state, to a potentially problematic one.
In order to extend the analysis, the below table shows population per store restricted to individuals 65 and older, on the theory they are heavier users of drugstores:
One fact that can gleaned from this table is that while Florida looks relatively concentrated on a total population basis, its concentration 65 and up is much less. This is somewhat problematic because it challenges the above use of Florida as a benchmark for concentration. Illinois and Wisconsin are already circumspect because they are Walgreen's oldest markets and it is highly likely the company has greater market share there than in other states. Rather than focus on precise figures here, we can use this a qualitative factor auguring for some additional caution compared to the total population analysis since it is difficult to determine the precise relevance of 65+ for drug store revenue.
In order to help readers form their own conclusions, the spreadsheet with the data can be found here. There are a number of methods that can be used to come up with estimates of overlap and some may give more optimistic or pessimistic conclusions. Ultimately, Walgreen is in the best position to judge the long-term financial impact of an acquisition, because it is not just about how many stores would be problematic. For example, there is a possibility that a large set of stores could be sold with little value diminution. There is also the issue of the value in building scale to better negotiate with pharmacy benefit managers who are themselves consolidating.
Disclosure: I am long WAG.