FTC queries Walgreens as deal concern grows

Walgreens and Rite Aid said Friday they have each received a request for additional information from the Federal Trade Commission regarding their proposed merger.

While the companies said the request was “expected” and “a standard part of the regulatory process,” under the requirements of the Hart-Scott-Rodino Antitrust Act, the request comes amid growing concern that the agency ultimately will not approve the $9.4 billion merger.

In a report issued separately this week, analysts at Wolfe Research said they had “deep concerns whether the merger will be approved,” citing factors including significant market concentration; a reduction in competition; reduced consumer choices; and the lack of a viable competitive remedy in the event of store divestitures. The deal could also be scuttled by states moving to block the merger independently of the FTC, Wolfe said.

“Our research and analysis suggests that the pending WBA/RAD merger is likely to face significant regulatory scrutiny and we have deep concerns whether the merger will be approved,” the Wolfe report, authored by Scott Mushkin, said. “This conclusion is driven by a number of factors, but most notably that the merger seems to go against the spirit of the antitrust laws in the U.S.”

According to Mushkin, the FTC would likely require just under 1,000 store divestitures — about the same the retailers contemplated in their merger agreement — but added the federal government “will need to thoroughly vet the competitive implications of the free-standing drugstore market as a result of this pending merger given the effective creation of a duopoly in the industry.”

That duopoly — the proposed Walgreens-Rite Aid combination and CVS — according to Wolfe’s analysts would result in combined drugstore market share of 70% or greater in multiple areas including Providence, R.I. (85% combined market share), Boston (84%), New York (82%), Philadelphia (76%), San Francisco (75%) and Charleston, S.C. (70%). That CVS would be one of the only viable buyers for divested sites is also likely to concern federal agencies, Wolfe noted.

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In addition, Wolfe said, going from three major retail pharmacies to two would likely hurt negotiating positions for healthcare plans, resulting in “higher costs for processing scripts due directly to a decrease in the amount of competition in a given market."

Rite Aid and Walgreens in filings said they did not expect the deal to cause regulatory concerns based upon the “complementary nature” of their businesses. The companies reiterated Friday that they expect the deal to close in the second half of 2016.

The FTC as a matter of policy does not comment on ongoing reviews.

The agency has come under criticism for approving a sale of divested Albertsons and Safeway stores to Haggen, only to see the latter declare bankruptcy after only months of operation. The FTC is also currently reviewing the proposed Ahold-Delhaize merger.

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