NEW YORK (Reuters Breakingviews) - Walgreens Boots Alliance has at least salvaged something from the wreckage of its deal to buy rival U.S. drugstore chain Rite Aid. After antitrust pushback on the full-strength $9.4 billion deal, Walgreens has abandoned it and is instead buying over 2,000 of Rite Aid's stores for $5.2 billion. For Chief Executive Officer Stefano Pessina, doing about half the deal with half the benefits is something – but it's a modest return on at least 20 months' work.
The acquisition, announced in October 2015, was always a high-risk, high-return venture. Adding over 4,500 locations would have combined two of the top three pharmacies in America and produced a projected $1 billion of annual savings. Investors initially added $5 billion to Walgreens’ market value.
Regulators proved harder to persuade. An initial proposal to divest 865 stores was bumped up to 1,200 in a revised proposal earlier this year. The Federal Trade Commission made it clear, however, that this still wouldn't cut it.
Walgreens is confident the new deal addresses watchdogs' concerns. And Pessina can claim there's still a decent rationale for the acquisition, even though Walgreens has to pay a $325 million break fee to Rite Aid for the old deal on top of the new price.
The purchase includes almost half Rite Aid’s stores, and Walgreens reckons there are at least $400 million of annual cost savings to be had. The value of those synergies should cover any premium Pessina is paying. And assuming the stores account for half of Rite Aid’s estimated net operating profit in 2020, it all adds up to a post-tax return on investment above 10 percent. Walgreens stock was flat in Thursday late morning trade in New York, when the broader market was down.
That's a far better outcome than the more than 25 percent slump in Rite Aid's shares. Even so, it's hardly the knockout transaction Pessina was aiming for. Given Walgreens and its executives have spent approaching two years on the deal, it may count as a dent in his strong deal-making reputation. Amid other big threats, including Amazon.com exploring the pharmacy business, all that time and effort could have been usefully directed elsewhere.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.