The merger of the mega-retail drugstores chains, Walgreens, and Rite Aid, is expected to create one of the world’s largest drug store giants. On Tuesday, Oct. 27 Walgreens Boots Alliance Inc. (NASDAQ: WBA) agreed to acquire Rite Aid Corp. (NASDAQ: RAD) for approximately $17.2 billion, including acquired net debt. This is a significant merger that could transform the retail drugstore landscape for consumers. 

Walgreens agreed to buy all outstanding shares of Rite Aid at $9 per share in cash, which was 45% higher than Rite Aid’s closing price as of Monday, Oct. 26th the day before the deal was announced. The merger received a positive response from investors.

Rite Aid’s stock rose 43% to $8.67 on Oct. 27 after The Wall Street Journal first reported on the merger talks. Walgreens shares rose 6.4% on Oct. 27th, 2015 to $95.16. Walgreens is fresh off the heels of a merger with European retailer Boots Alliance Inc., which expanded Walgreens reach of some 8,000 stores across the U.S. to thousands of stores in Europe.In recent years, the three major drugstore chains in the U.S. have been Walgreens, Rite Aid and CVS Health Corp (NYSE: CVS).

The Walgreens-Rite Aid merger doesn’t just impact investors and shareholders, but also communities and consumers across the U.S. It comes at a time when drugstores are wrestling with fierce competition from online retailers and big-box stores such as Target (NYSE: TGT) and Wal-Mart (NYSE: WMT). In announcing the deal, both Walgreens and Rite Aid said that they wanted to step up services and products that focus on health and wellness, which reportedly include in-store clinics that provide health screenings and flu shots. CVS also provides these services.

Firstly, the merger significantly expands the retail drugstore footprint across the country “with 12,000 retail pharmacies. That's nearly 20% of the brick and mortar pharmacies in the United States,” according to B. Douglas Hoey, RPh, CEO of National Community Pharmacists Association as reported in the Pharmacy Times.  

The merger will potentially have a significant impact on Rite Aid employees, and also on companies that have relationships with Rite Aid. For example, in Pittsburgh, Pa, Rite Aid is a major client for Marc USA the Pittsburgh-based advertising firm with a reported one-third of Marc's staff focused on the Rite Aid account. Marc USA's staff could be shifted to other accounts, or there could be potential downsizing with the merger. Further, according to a Pittsburgh Post-Gazette article, almost all of Rite Aid’s employees are covered under Pittsburgh-based Highmark’s health insurance, and the merger could impact whether employees of the newly combined companies would continue to be covered under the same provider. The deal could also have a ripple effect on net lease sector, which often involve properties owned by numerous tenants in a shopping center. 

The Merger's Impact on Drug Prices

The merger could mean lower drug prices —a more robust chain could mean more bargaining power with drug companies. It could also negatively impact consumers if they have fewer drug stores to turn to. After the merger is completed, CVS would be the only other mega retail drug store in the U.S.

This could be a win or loss for local mom and pop drugstores, Richard Collier, a pharmacist at the independent drugstore Chambersburg Apocothary in Chambersburg, Pennsylvania, was quoted in Public Opinion as saying. Small pharmacies may initially gain more business as the dust settles with the mega merger. But the Walgreens-Rite Aid alliance could eventually mean more competitive prices on services and products for consumers. It could mean more clinics in the Rite Aid stores with an expanded selection of health and wellness products such as vitamins.

Other reports suggest that the deal would not lighten consumers’ wallets, and the combined company could mean fewer brands to select from. The chains have been competing neck and neck with big-box retailers such as Target and Walmart that have expanded their services to in-store pharmacies. For some small communities, the deal means that Rite Aid or Walgreens are also putting their expansion plans on hold as the companies focus on seeing the merger through. Rite Aid, based in Camp Hill, Pa., has about 4,600 drugstores in 31 states. Walgreens has roughly 8,200 U.S. stores while CVS Health Corp. has more than 7,800.

The Bottom Line

The Walgreens-Rite Aid merger may leave a window for mom and pop and drug stories to capture more business and customers in the short-term. Dr. Babic Babikian, the owner of B&G Pharmacy in East Hollywood, Calif., has many customers from the community who are loyalists.

In an LA Weekly article, Babikian commented on the merger stating, "All that they look at is numbers, and those decisions are made by individuals that are so distant from the consumer, so distant, numbers is all they look at."

Ultimately, in the long-run, the combined company is likely to mean more bargaining leverage with drug companies, and more services and a wider selection of products related to health and wellness.

The merger could mean significant savings for consumers since as separate businesses Walgreens and Rite Aid have been hit by drug-price inflation. 

Finally, the merger appears to be a trend in the healthcare and pharmaceutical sectors. According to Dealogic, 2015 has seen some $427 million worth of merger deals so far amongst drug companies, hospital chains, and health insurers.

 

 

 

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