Drugstore Deal Abandoned Ftc Opposition Forces Rite Aid To Withdraw Its Bid For Revco
Rite Aid Corp. dropped its $1.8 billion takeover offer for Revco D.S. Inc. after failing to convince regulators that merging the two biggest drugstore chains wouldn’t hurt consumers. The acquisition would have created a company with $11 billion in revenue and 4,800 stores. Rite Aid would have dominated markets in the Carolinas, Maryland, New York, Pennsylvania, Ohio and West Virginia.
The Federal Trade Commission last Wednesday threatened to sue to stop the purchase. New York, Ohio and West Virginia also said they were preparing cases to oppose a transaction they claimed would drive up retail drug prices.
“Rite Aid just threw up their hands,” said Juan Noble, an analyst with Jackson Partners & Associates. “They figured this was an insurmountable, bureaucratic obstacle they could not get around.”
News that Camp Hill, Penn.-based Rite Aid had abandoned its bid surprised many investors and Wall Street analysts, who thought the company was nearing a settlement with the FTC.
Earlier this week, Rite Aid, the nation’s largest drugstore chain, offered to divest 340 stores to satisfy the agency’s concerns. The company also offered to give up 10 Pennsylvania stores as part of a settlement with the state.
The FTC and the states said Rite Aid’s offer wasn’t close to what they were seeking. Wednesday, Rite Aid said that the FTC wanted it to divest 650 to 700 stores as a condition for approval.
Rite Aid Chairman and Chief Executive Martin Grass said the FTC wasn’t interested in reviewing the facts of the case impartially.
When the company responded to the demands of FTC staff, “the bar was raised in such a way as to make it impossible for us to clear it,” he said.
In a statement, Revco President and Chief Executive D. Dwayne Hoven said the FTC’s stance doesn’t rule out further consolidation in the industry.
“Our performance has been among the strongest in the industry and we are confident we will continue to be a strong competitor,” Hoven said. Twinsburg, Ohio-based Revco operates about 2,100 stores.
Shares of Revco fell $1.875 to $24.125 on Wednesday. Rite Aid shares dropped $1.75 to $29.875.
Antitrust Concerns Several states today denied Rite Aid’s assertion that the FTC impeded negotiations between the company and the individual states.
“Any characterization that we were pressured not to settle, apart from our own independent wishes, is not accurate,” said Todd Boyer, public information officer for Ohio Attorney General Betty Montgomery.
“The bottom line is consumers, particularly those in upstate New York, would have been saddled with higher costs.” said Margot Pagan, deputy press secretary for New York Attorney General Dennis Vacco.
Attorneys general in New York, Ohio, Indiana and West Virginia planned to file their suits this week. Maryland also was considering a suit, as were several other states.
The FTC also focused on the increased bargaining power Rite Aid would have in its dealings with pharmacy-benefit companies, which have gained importance in keeping health-care costs down for employers.
With a majority market share in certain regions, Rite Aid could threaten not to work with managed-care companies unless it received generous reimbursement fees for prescriptions it fills.
Industry followers and antitrust lawyers said the FTC’s rejection of the Rite Aid-Revco combination doesn’t put an end to consolidation in the drugstore industry.
“Market characteristics clearly show that no other combination of companies would bring into play as many potential problems in terms of store overlap,” said Ronald Ziegler, president and chief executive of the National Association of Chain Drug Stores.
A similar situation already has happened and gained the attention of the FTC and Maryland Attorney General. As the largest drugstore chain in Maryland, the company’s decision not to work with Merck & Co.’s Medco Containment Services last December added to the state’s decision to rebid the $266 million contract.