Merger Failure: New Industry Direction?

Walgreens’ decision to pull the plug on its acquisition of Rite Aid signals a change in direction for the entire industry. Mega mergers are out; alliances are in.

“Now that Walgreens has worked through the Rite Aid purchase, and with CVS having bought Target’s pharmacies within Target stores, we don’t see any large mergers in the drug space,” said John Boylan, Senior Equity Analyst for Edward Jones.

There are no further match-ups anticipated at the large end of the industry, Boylan noted. Other industry observers have suggested potential mergers could occur farther down the size scale.

Possibilities include Fred’s acquiring what is left of Rite Aid or private investors rolling up Fred’s and other smaller regional chains into a larger entity. But don’t look for any significant acquisitions by market leaders CVS or Walgreens, he said.

Related article: Walgreens/Rite Aid Merger Scrapped

“What we’ll probably see is more partnerships going forward,” Boylan predicted. “Rite Aid has the option of joining the Walgreens Boots Alliance Development (WBAD) group, or CVS and Cigna launching Cigna Health Works, the list goes on and on.”

Walgreens is buying 2,186 Rite Aid stores and three distribution centers for $5.2 billion. If the Federal Trade Commission approves the purchase, Rite Aid will be left with just over half its current store count. The reduced chain will have stores in the East and West, but no presence in the Midwest.

“It should be easier to get [FTC] approval because the new transaction is an asset purchase, not an acquisition,” said Adam Fein, PhD, President of Pembroke Consulting. “Walgreens gains increased presence in in the Northeast and Southwest.”

Fein noted that the other big winner is wholesaler AmerisourceBergen. The 2,186 Rite Aid stores now served by McKesson will eventually move to AmerisourceBergen, Walgreen’s wholesaler. McKesson could lose even more if the remaining Rite Aid stores move to WBAD to improve generic discounts and profits.

“Any time you can partner with somebody and make a better purchasing arrangement, it helps all the parties involved,” Boylan said.