Walgreens-Rite Aid Review Haunted by Failed Remedies (Corrected)

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By Liz Crampton

Walgreens Boots Alliance Inc.'s $9.4 billion bid for Rite Aid Inc. is down to the wire, and with the national retail drug-store chains' self-imposed deadline for completion on Friday, approval likely hinges on U.S. regulators' confidence in Fred's Inc.

The stores have spent the past 14 months trying to convince regulators to sign off on their $9.4 billion merger. If they don't close by the deadline, either party can walk away.

Agency officials aren’t convinced that Walgreens’ proposal to sell several hundred drugstores to Fred’s Inc. would fix the competitive issues posed by the merger, Bloomberg News reported Jan. 20. The government has concerns about whether Memphis-based Fred’s, which agreed in late December to buy 865 Rite Aid stores, can be an equally robust competitor.

“It’s the key issue for them in assessing whether or not the deal should proceed at all,” antitrust attorney George Paul, a partner at White and Case LLP, told Bloomberg BNA. “They clearly seem to be thinking that the alleged harm from the case is coming from the ability of Rite Aid, Walgreens and CVS to provide unique services on a national scale.”

“If that’s their theory of harm then they need to be confident … that Fred’s can step into the shoes and replace any and all lost competition from Walgreens,” he added.

Fresh in the minds of Federal Trade Commission lawyers are the bankruptcies that followed divestitures agreed to as part of the 2015 merger of the Albertsons Companies Inc. and Safeway Inc. supermarket chains and of Hertz Global Holdings Inc. and Dollar Thrifty Automotive rental car companies two years earlier.

Search for Strong Buyer

The FTC’s primary question when vetting a proposed asset buyer like Fred’s is whether the company has the ability to take on new stores.

Fred’s has reported sluggish financial results after declines in pharmacy and retail sales. Company CEO Mike Bloom called the most recent quarter, with a 4.5 percent drop in sales compared to the same period last year, “not acceptable” in a December earnings call with investors.

Focused primarily in the Southeast, Fred’s operates more than 650 stores. Walgreen’s has approximately 8,177 stores across the country and Rite Aid has about 4,600.

A potential problem with divestiture proposals is that the companies are the ones who propose the buyer, not the antitrust regulators, said Steven Salop, an antitrust professor at Georgetown University. Merging companies don’t have the incentive to propose the strongest rival they will have to compete with later, he said.

Bungled Remedies

FTC lawyers don’t want a repeat of what happened after Albertsons Companies Inc. and Safeway Inc. sold 146 stores to small regional grocery chain Haggen Holding Inc. in order to receive FTC approval for their deal in 2015.

At the time, FTC Chairwoman Edith Ramirez said the settlement would ensure that consumers in five states along the West Coast, where the stores were located, would continue to benefit from competition among their local supermarkets.

That arrangement quickly fell apart. Haggen had trouble running the new stores and sales slipped. Layoffs followed and the grocer ended up selling and closing stores, transferring several dozen back to Albertsons. Haggen then filed for bankruptcy.

Haggen retaliated by suing Albertsons for $1 billion, alleging the grocery company tricked it into buying stores to ease the Safeway merger then sabotaged Haggen’s entry into the new markets. Albertsons agreed to pay $5.75 million to settle the lawsuit.

The agency also fumbled two years earlier when it required Hertz Global Holdings Inc. to sell off its Advantage Rent a Car brand in order to acquire car-rental rival Dollar Thrifty Automotive Group Inc. in 2013. Four months after the settlement, Advantage filed for bankruptcy.

Corrects Salop’s comments by removing the 11th paragraph.

To contact the reporter on this story: Liz Crampton in Washington at lcrampton@bna.com

To contact the editor responsible for this story: Tiffany Friesen Milone at tmilone@bna.com

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