In watching the financial news this morning on CNBC and noticed on the stock ticker that Rite Aid was up about 30% which immediately made me curious as to the rationale behind such a big jump. Then, a few minutes later, the news broke that they were in merger talks with pharmacy giant, Walgreens, and it all made sense.
The proposed merger was just formally announced a few minutes ago at the end of the business day here in the Northeast, with Walgreens set to pay $17 billion to obtain Rite Aid. The deal, if confirmed through regulatory channels, would merge two of the top three pharmacy chains in the United States.
Walgreens has been active in recent years with mergers and acquisitions of other regional pharmacy chains, Rite Aid was one of the last major players in the marketplace to essentially complete the major consolidations of the landscape in that industry. The proposed merger would give Walgreens an enhanced presence in the Northeast and Mid-Atlantic regional markets and bolster their competition with market leader CVS.
The other rationale for the merger is to gain leverage with PBMs and other distributors for better pricing on prescription drug products. A combined Walgreens – Rite Aid conglomerate would have a better chance to forge deals with suppliers than if they remained separate entities. This activity comes amidst rising demand for prescription drugs due to the availability of healthcare coverage provided by the Affordable Care Act.
However, the major pharmacy chains such as CVS and Walgreens have been warding off increased competition from club stores and the appealing mail order pharmacy providers which have gained traction in recent years. In a move that received comparatively little mainstream media coverage earlier in 2015, CVS acquired the prescription pharmacy component of Target stores for a little under two billion dollars. The company plans to change over some of the in-store pharmacies to CVS locations within Target floorplans. That represented a big move by CVS to gain a bigger presence in the market and gain penetration into the types of big-box retail stores that have become the main competition for them in recent years.
Walgreens issued a statement today indicating that, at least in the near term, Rite Aid will remain as a brand and that they will not be changing the names of retail locations over to Walgreens. In the future, the Rite Aid name which has stood for decades in the Northeast could disappear. The stock price of Rite Aid did shoot up today in trading by 40% by the end of the day on Wall Street. Conversely, Walgreens was up about 4% at the close of the day.
What does this mean for the consumer? Well, in short, it will mean less competition and less choice in the options for where your family will have their prescriptions filled, it could mean higher prices but ultimately it could provide a better alternative for the consumer if the combined entity is able to leverage distributors into better pricing.
However I always return to the fear of monopolies, whenever too few companies are in control of a commodity as important as prescription drug products, I have to give pause to the consumer. I know that many neighborhood pharmacies today look like retail corner stores with the amount of personal care items they stock, but do not let that fool you, the majority of sales at Walgreens or CVS are still derived from prescription drug products (about 70%).
Consolidations have the downside of eliminating consumer choice from the marketplace, as it did with this proposed transaction. Rite Aid was carrying debt, but it controlled roughly 10% of the prescription pharmaceutical sales in the market and could have lived on without merging with Walgreens. In the end it comes down to the money, and Walgreens made an aggressive bid which provided a roughly 40% premium over the current valuation of the company. If I put it simply: the deal was too good for the shareholders to pass up.
Duke Energy Bets on Natural Gas
The other big merger in the headlines is in the energy industry segment and it involves Charlotte based Duke Energy buying Piedmont in a deal that is massive for Piedmont, and would represent less than 10% of Duke Energy overall. However, the deal reflects the need by Duke to obtain a better position in the natural gas segment of the energy marketplace.
The proposed deal has received some criticism, because if you follow the commodities markets, natural gas is down significantly because of extended periods of mild weather through this Autumn season throughout the USA. Therefore the demand for natural gas is diminished, but it would appear that Duke Energy is banking on a change in that demand curve when the winter months come roaring in.
Most long term forecasters for weather models are split on the amounts of snowfall or major storms we will see this winter but most of them agree that we will not see the record cold temperatures that we did last winter. Duke Energy has a good sense of the marketplace so I am sure that they feel that this investment will yield once the winter gets into full swing.
Natural gas also has a reputation for being cleaner than other energy sources so Duke is most likely going to look to capitalize on that trend as well. It is yet another merger in an increasingly consolidated business landscape.
The next big merger to watch: Bridgestone Tire proposed consolidation of the Pep Boys auto repair chain. In the end I hope that these consolidations will benefit the consumer but I am always reticent when two of the top players in any industry join forces, which is what we had today with Walgreens and Rite Aid; whether or not that benefits the consumer or just limits competition remains to be seen.