Walgreens, Rite Aid nuptials not likely, but it sure makes for a compelling twist
WHAT IT MEANS AND WHY IT'S IMPORTANT — Former Walgreens' CEO Jeff Rein said profit pressure might cause Walgreens to think differently about acquisitions than it did in the past. The loss of Express Scripts patients (who are incidentally taking their prescriptions to the nearest Walgreens competitor), coupled with a significant generic wave through 2012 — moreso in the back half of the year — potentially could keep Walgreens from posting a profit through fiscal 2012. "Walgreens is in a real poor position here," Rein said. "Unless they do pick up more scale and they're able to fight back."
(THE NEWS: Former Walgreens CEO offers perspective on WAG-RAD merger speculation. For the full story, click here)
Rumors that Rite Aid is the next likely acquisition target to be picked up by one operator or another have been circulating for a while now. It wasn't even a year ago when Crain's New York Business paired Walmart with Rite Aid as the Pennsylvania chain's next likely suitor.
All of that acquisition speculation from multiple potential suitors has much to do with Rite Aid's low stock price (yet improving performance) than anything else. Only one day before Credit Suisse' initial speculation, drug industry pundit Adam Fein picked up on the fact that Rite Aid's same-store results is certainly pointing in the right direction — up — and that the company more and more looks like it will return to the land of black ledgers. "Same-store pharmacy sales are growing, the company is getting a bit trimmer, debt is (slowly) being paid off, and the stock price has doubled since October," Fein wrote in his DrugChannels blog. "They have a long way to go to achieve actual business health, but I see a low risk of outright bankruptcy. Rite Aid’s $6 billion-plus debt load remains a big deterrent to any potential acquirer … unless Walgreens gets very, very desperate."
Walgreens in January told shareholders to expect this kind of rough road ahead. They told shareholders that had the company accepted the proposed reimbursement rates offered by Express Scripts, Walgreens' would be locked into a rather-large contract that would have them dispensing prescriptions at a loss. Any short-term loss from exiting Express Scripts will have been mitigated by the long-term losses they would have incurred had they signed with the pharmacy benefit manager, the chain said.
Initially, investors certainly seemed to be on board with the possibility of a Walgreens/Rite Aid merger. Shares in Rite Aid were up almost 10%, to $2.05, in trading the day Credit Suisse first speculated on the feasibility on a Walgreens acquiring Rite Aid — that's the highest stock value for Rite Aid since mid-2008. However, by the time Credit Suisse sat down with Rein, the bloom may have worn off the rose somewhat as indicated by a drop in Rite Aid's stock price to $1.95 per share, and three days after the Rein interview, to $1.78, or slightly below the valuation the stock held prior to all of the Credit Suisse speculation.
Similar to the stock market, DSN's coverage of that initial story became the most-viewed story on the site in just a few days. The No. 2 story? Rein's explanation on the why all of this should go down. So this whole Walgreens/Rite Aid scenario certainly has grabbed everyone's attention.
And it could happen. Rein and Ed Kelly at Credit Suisse sure provided some compelling arguments as to why it should happen — Walgreens would be crowned the drug store king in two of the largest U.S. markets in New York and Los Angeles, and the chain would gain that much more leverage in negotiating future pharmacy reimbursement rates.
But that doesn't mean a marriage between Walgreens and Rite Aid is likely to happen. It doesn't even mean it should happen.