By Candace Kellner
Walgreens announced on Tuesday, Oct. 27, that it will propose to buy its rival, Rite Aid, in a $17.2 billion deal that will merge the second and third largest drugstore operators into one massive chain. Walgreens is still waiting to get regulatory approval, according to USA Today, and if the deal is approved, the merger will intensify the already fierce competition between Walgreens and CVS Health.
This shift in the market is a result of the rapidly changing healthcare industry, which is seeking additional negotiating leverage against drug companies, and increasingly offering clinical services.
Walgreens Boots Alliance (WBA), which operates the drugstore chain, said the company expects to save more than $1 billion in “synergies,” which could come in the form of combined purchasing power and cost cuts.
“Working together, decisions will be made over time regarding the integration of the two companies, ultimately creating a fully harmonized portfolio of stores and infrastructure,” Walgreens said in a statement, USA Today reported.
CVS currently has 58 percent market share in the pharmacy and drugstore business, while Walgreens controls 31 percent and Rite Aid has 10 percent, according to research conducted by IBISWorld, a business analysis organization. The industry has $263 billion in annual revenue and $10.3 billion in profit.
Pharmacies are fending off competition from mail-order prescription discounters, online pharmacies and wholesale retailers such as Costco and health clinics. Consolidation gives the drugstore companies more leverage to negotiate with drug companies, according to USA Today.
“It is to get leverage against not only drug companies, but also other competitors in the marketplace,” said John Boylan, an Edward Jones senior equity analyst, USA Today reported.
When the proposed deal was announced, Walgreens and Rite Aid, Rite Aid shares (RAD) soared 43 percent to close at $8.67 and WBA stock rose 6 percent to $95.16 and jumped an additional 1 percent in aftermarket trading.
“Today’s announcement is another step in Walgreens Boots Alliance’s global development and continues our profitable growth strategy,” WBA CEO Stefano Pessina said, USA Today reported. “In both mature and new markets across the world, our approach is to advance and broaden the delivery of retail health, well-being and beauty and products and services.”
Rite Aid CEO John Standley said the deal “will enhance our store base and expand opportunities as part of the first global pharmacy-led, health and wellbeing enterprise,” USA Today reported. Rite Aid’s second-quarter revenue rose 17.5 percent to $7.7 billion, compared to the same period a year earlier.
Boylan believes that Rite Aid’s strong presence in the northeast and mid-Atlantic may be enticing to Walgreens. Walgreens executives will discuss the deal with investors when they reveal the company’s fourth-quarter earnings.