Why Walgreens Is Spending $17.2 Billion to Buy Rite Aid
[E]ven though you will be left with two large traditional pharmacies, this is a very competitive market.
Second, the combination would likely bring cost synergies in the form of sharper prices from branded and generic drug manufacturers. Saving money on the medications they sell is vital given the likely long-term upward trajectory in healthcare costs due to Obamacare and more boomers moving onto Medicare/Medicaid. Walgreens outlined that it expects to realize synergies in excess of $1 billion.
If a combined Walgreens/Rite Aid is able to negotiate lower costs for their prescriptions, it could be reinvested in making retail prices more competitive for consumers and help wrestle market share away from Walmart, Target and CVS Health.
Portfolio manager Chris Pultz at Kellner Capital, which specializes in merger arbitrage, said that “even though you will be left with two large traditional pharmacies, this is a very competitive market. You still have the specialty pharmacies, pharmacy benefit managers like Express Scripts(ESRX) and mail order firms like Unh’s, Optimum RX and even Walmart (WMT) — in the end, divestitures should be able to solve any problems the Federal Trade Commission may have.”
Added Pultz, “Rite-Aid has been closing stores over the last few years in order to stabilize its business, and I would expect there to be additional store closures as the two companies are integrated.”
Walgreens Boots Alliance declined to comment for this article, while CVS Health didn’t respond to requests for comment.