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Walgreens Needs More Time To Divest Stores To Win Rite Aid Deal

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Walgreens Boots Alliance said it has agreed with Rite Aid to extend the end date of its merger agreement by another three months as the two drugstore giants work to divest up to 1,000 stores to win U.S. regulatory approval of their deal.

Walgreens and Rite Aid now expect the deal to close in early “calendar 2017” after extending the merger agreement date from Oct. 27 to Jan. 27, 2017, the companies announced.

"We are as confident as we were before about the deal," Walgreens CEO Stefano Pessina told analysts and investors Thursday on the company's fourth quarter earnings call. "We have just delayed the completion of the deal."

The announcement comes during a period of intense regulatory scrutiny from U.S. antitrust regulators with the Justice Department suing to block both the proposed purchase by health insurer Aetna of rival Humana as well as Anthem’s proposed purchase of Cigna. In the Walgreens-Rite Aid deal, it’s the Federal Trade Commission that is evaluating the transaction and demanding divestitures if the deal is going to win approval.

“Walgreens Boots Alliance remains actively engaged with the Federal Trade Commission regarding its review of the pending acquisition, and continues to expect that the most likely outcome will be that the parties will be required to divest between 500 and 1,000 stores,” Walgreens said today. “The company believes that it will be able to execute agreements to divest these stores to potential buyers, pending FTC approval, by the end of calendar year 2016, and now expects its acquisition of Rite Aid will close in early calendar 2017.”

The grocery store chain Kroger has reportedly been interested in purchasing more than 600 of the stores that would be divested from Walgreens and Rite Aid. Kroger stores operating under several names including Pick 'n Save, Food 4 Less, Mariano's and Smith's.

But a report this week in the New York Post said the FTC told Kroger that the stores “couldn’t be purchased and closed, with the operations moved inside the stores,” the newspaper said citing two sources close to the talks.

Still, Walgreens is expecting its deal to close, saying Thursday in its fourth-quarter earnings release that the company still expects the “acquisition will be accretive” to earnings per share in the first year after closing the transaction.

Despite the large divestiture of stores, Walgreens would be left with more than 11,700 U.S. stores. Walgreens has 8,200 U.S. stores and Rite Aid has 4,500. Even a divestiture of up to 1,000 stores would make Walgreens larger than CVS Health and its 9.600 pharmacies 

Walgreens expects to add 5 cents to 12 cents per share in Rite Aid "accretion" to earnings next year. Walgreens announced 2017 earnings guidance of between $4.85 to $5.20 per share.

In the company's fourth quarter, Walgreens said sales were largely flat, rising just 0.4 percent to $28.6 billion. Net earnings jumped to $1 billion, or 95 cents a diluted share in the quarter ended Aug. 31, compared to $26 million, or two cents a share in the year ago period.

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