Walgreens (WBA) Seen Gearing Up for Legal Fight with FTC Over Rite Aid (RAD) - Source
As the FTC prepares to vote on the merger between Rite Aid (NYSE: RAD) and Walgreens (NYSE: WBA), many investors are already looking past the decision with an eye on the legal battle that may determine the fate of the multi-billion dollar tie-up. The FTC is widely expected to block the deal. However, according to a source familiar with the company’s thinking, Walgreens is positioning for a fight.
Walgreens has already certified compliance to force the FTC into a decision by July 7th. Now, faced with a likely adverse vote from the FTC, Walgreens' lawyers are said to be preparing to head to court.
FTC staff think the merger would be anticompetitive and don’t believe Fred’s (NASDAQ: FRED), which is buying hundreds of stores, is a big enough competitor to change the dynamic. These concerns appear to be the driving factor for the expected no vote from both FTC commissioners Maureen Ohlhausen and Terrell McSweeny.
McSweeny, a Democrat, was widely seen as opposing the merger. However, some held out hope Ohlhausen, a Republican and acting Chairman, would vote in favor of the merger, thereby allowing it to pass with a 1-1 tie. If Walgreens is truly gearing up for a fight, it may suggest that Ohlhausen is also against the deal.
Cowen analyst Charles Rhyee sees at least $1 billion in synergies from the combination, and in his view this is enough motivation for Walgreens to pursue Rite Aid through litigation if the FTC blocked the deal. He thinks the $1 billion in synergies is likely conservative given that Walgreen’s management stated synergies in excess of $1 billion over 3-4 years, as well as the fact that it realized well over the $1 billion synergy target during the WBA merger.
If Walgreens decided to fight the FTC decision, it could be banking on a future settlement with the FTC that would allow the merger to pass muster with a limited number of further concessions.
Walgreens reports results on Thursday of this week and could announce an update on the Rite Aid merger with the report.
Shares of Rite Aid were up 23% mid-day Monday on a speculative report from CTFN that the FTC could approve the merger, citing sources not directly involved in the process.
Walgreens would not comment when asked to respond to rumors they would continue to fight through the courts if the merger was blocked.