Fred's Acquiring 865 Rite Aids; Swells to 3rd-largest U.S. Drug Chain

12/20/2016

Putting to rest months of speculation, the acquisition by Walgreens Boots Alliance of Rite Aid has taken the next step to cross the the finish line, with Memphis, Tenn.-based Fred’s Pharmacy set to purchase all of the 865 stores in the eastern and western United States for $950 million in cash.

Describing the massive store acquisition “a transformative event,” Fred's Pharmacy CEO Michael K. Bloom said the deal positions the 650-store regional chain to dramatically “accelerate our healthcare growth strategy through our acquisition of 865 new stores located in highly attractive markets.”

The store divestures soon to be owned by Fred’s were stipulated by the Federal Trade Commission to ease antitrust concerns about the Deerfield, Ill.-based Walgreens $9.4 billion acquisition of Rite Aid, which was announced in October 2015. Under the terms of the purchase agreement, Fred’s will acquire the 865 Rite Aid stores and assets related to store operations, and expects to continue to employ all store associates and certain field and regional associates related to the operations of the acquired stores upon completion of the divestiture. Fred’s will continue to operate the acquired stores under the Rite Aid banner during a transition period. If the FTC requires divestiture of more than the 865 Rite Aid stores currently contemplated by the purchase agreement and Walgreens Boots Alliance agrees to sell such stores, the purchase agreement requires Fred’s to purchase such additional stores.

The transaction is set to close during the first half of 2017 and will position Fred's Pharmacy as the third-largest U.S. drugstore chain, as well as a new national competitor on the scene in an already intense retail landscape.

Closing of the transaction is expected to take several months after Walgreens’ proposed acquisition of Rite Aid is completed and approved by the FTC; shareholder approval is not required.

“We believe that this transaction will also create tremendous opportunities for both our new and existing front of store and pharmacy team members,” said Bloom, adding that the Fred’s organization is pumped about the prospects of “realizing the considerable benefits this transaction will bring to our customers, patients, payors, supplier partners, team members and shareholders."

After working for several months on integration plans to ensure a seamless transition for Rite Aid’s allied base of customers, patients, associates and suppliers, Bloom pledged that Fred’s will leverage “our world-class senior leadership team's significant expertise in managing major healthcare acquisitions and integrations. We assembled this highly experienced team in 2015, implemented upgrades to our infrastructure in 2016, and now, in 2017, we look forward to the continued optimization of our business, fueled by today's milestone announcement. We believe the purchase of these stores will not only complement recent investments in our team members, processes, and technological infrastructure, but also positively impact our business and maximize shareholder value."

Rite Aid Chairman and CEO John Standley expressed appreciation for “the dedication of our associates, who are taking great care of our customers and patients during this period. We look forward to working closely with Fred’s to ensure a smooth, successful transition for our customers, patients and associates in the divested stores.”

In aggregate, the 865 stores are generally representative of Rite Aid's pre-divesture store performance with respect to both sales and EBITDA. Fred's Pharmacy expects that the acquired stores would be accretive to earnings and generate substantial cash flow.

Fred's Pharmacy will continue to employ, contingent on consummation of the transaction, store and certain field and regional team members related to the operations of the acquired stores. Upon completion of the acquisition, the Company will operate the acquired stores and will retain the Rite Aid banner through a 24-month transition.

A.T. Kearney served as a strategic advisor to Fred’s management team and board of directors and provided financial and operational diligence related to the transaction. BofA Merrill Lynch and Regions Bank have committed to provide financing to Fred's Pharmacy. Peter J. Solomon Company, LLC provided a fairness opinion to Fred’s board of directors in connection with the transaction.

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