Takeover of drugstore chain Rite Aid will solidify WBA’s position as US market leader but integrating the business won’t be easy.
In October, Walgreens agreed to take over drugstore chain Rite Aid in an all-cash deal worth $9.41bn (£6.46bn), creating a business proposition that will dominate its closest competitor, CVS Health Corp.
The deal will not only solidify WBA’s position as US market leader, but generate substantial operational efficiencies and, if synergies are fully leveraged, cost savings.
On the flipside however, WBA’s debt level will rise, with the transaction expected to be heavily financed with debt. The big question, then, is really how will the deal, and the subsequent integration of the acquired business, be paid for?
Given the relatively short timeframe between this deal and Walgreens’ acquisition of Alliance Boots in December 2014, the complexities involved in integrating the businesses will certainly place pressure on management, potentially distracting focus from core operations.
Furthermore, for any deal to receive Federal Trade Commission (FTC) approval, there will very likely be a substantial number of store divestments required. The FTC’s recent behaviour, particularly in regard of the Staples-Office Depot merger, suggests that, while a duopoly in a given sector is tolerable, it draws the line at monopolies.
Numbers bandied around by commentators seem to suggest WBA would be required to shed anything from 800 to 1,000+ locations.
The obvious beneficiary of this would be CVS, meaning some of the advantages of the Rite Aid deal would be defrayed. Were CVS to decline those sites, grocery operators – maybe even discounters – might snap them up.
Achieving any potential synergies will take time, especially when dealing with the integration risks so soon after combining Walgreens with Alliance Boots, and with Rite Aid only still absorbing the recently purchased pharmacy management business EnvisionRx.
What is encouraging is that management continues to focus efforts on enhancing operational performance. While this has yet to yield high profit margins, it is outweighed by the company’s strengths, such as its robust revenue growth and good cash flow from operations.
Revenues of $29.03bn (£19.93bn) in the period ended November 30 missed the $29.56bn (£20.29bn) Wall Street had expected.
Looking ahead, the business is in a cautious mood, narrowing its earnings forecast range for 2016.
Walgreens Boots Alliance (WBA) beat profit expectations in its first quarter, delivering group earnings of $1.11bn (£760m).