Fred's Stock Takes a Hit After Walgreens-Rite Aid End Merger Plan

Regional pharmacy chain Fred's Inc. enjoyed a runup in its stock price and attention after being invited to buy a large chunk of stores to satisfy antitrust concerns in Walgreens Boots Alliance Inc.'s plan to buy Rite Aid Corp.

It was, as it turns out, an Icarian climb.

Walgreens said Thursday it planned to buy half of Rite Aid's stores, instead of buying the company outright and selling 865 stores to Fred's, a move Fred's called a "disappointing outcome." The retooled deal nixing Fred's involvement stymied the Memphis, Tenn., company's plans to become a national player in the sector.

Fred's said Thursday it will be paid a $25 million termination fee to cover its expenses related to the aborted merger. Shares tumbled 22% to $9.65, levels not seen since before the spotlight was fixed on the company by the merger.

The early version of the Walgreens-Rite Aid tie-up would have more than doubled the size of Fred's, which owned about 650 stores and had a market capitalization of roughly $400 million before the December announcement of its involvement in the deal. Shares in Fred's skyrocketed 81% when news broke about its plans to acquire 865 additional stores for $950 million, financed by pledging nearly all of its assets -- down to furniture -- to back some $1.65 billions in loans.

"While the acquisition of additional stores was an opportunity for growth, we always viewed it as a potential outcome that would accelerate our transformation, not define it," said Michael Bloom, Fred's chief executive, in prepared remarks Thursday. A call to Fred's seeking further comment wasn't immediately answered.

Federal regulators were concerned the earlier Walgreens-Rite Aid deal, which would have married the second- and third-largest U.S. pharmacy chains by sales, could stymie competition. Divestitures are often required in large deals to assuage concerns over market power and consolidation within specific markets and industries.

U.S. regulators had to be convinced, among other concerns, that Fred's could legitimately replace the competition if Rite Aid merged with Walgreens.

On Wednesday, Fred's also adopted a poison pill to limit the ability for investors such as Alden Global Capital LLC, which has a 25% stake in the company, to add to its holdings. The company said the move was because of "increased trading activity" ahead of Walgreens's announcement Thursday.

And while the plunge of Fred's stock price was steep on Thursday, as doubt about the merger began to build, shares had been deflating slowly almost as soon as they had shot up, falling from $18.29 at the beginning of January to $14.12 at the start of June.

Write to Ezequiel Minaya at ezequiel.minaya@wsj.com

(END) Dow Jones Newswires

June 29, 2017 10:25 ET (14:25 GMT)