Walgreens Boots Alliance Inc. and Rite Aid Corp. scrapped their $9.4 billion merger agreement, the latest in a series of high-profile deals to be derailed by antitrust enforcers.
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Instead, Walgreens said it would seek to buy half of Rite Aid's stores for $5.18 billion in cash. Executives said they had crafted the smaller deal to address regulatory issues, but antitrust experts said it doesn't eliminate competition concerns.
The aborted deal was a reminder that mergers leading to high levels of industry concentration may face challenges even as more business-friendly Republicans take the reins from Democrats in antitrust enforcement.
The late stages of the review held additional intrigue because the Federal Trade Commission, which enforces antitrust and consumer-protection laws, is currently short-handed with just two commissioners -- one Republican and one Democrat.
Other federal agencies also are operating with vacancies since the U.S. presidential election, creating a prolonged period of uncertainty for businesses exploring mergers and seeking other types of regulatory approval from the government.
Despite a surging stock market and historically low borrowing rates, the pace of deal making has slowed from the previous two years. Companies have announced U.S. deals in the first half of the year worth $581 billion so far, down 17% from the same period last year and nearly a third below 2015, according to Dealogic. Bankers say uncertainty about corporate tax rates have weighed on sentiment at least as much as regulatory concerns.
The slowdown has been particularly acute among megadeals and with tie-ups in the health-care sector where M&A activity is down 30% year-to-date, said Richard Peterson of S&P Global Market Intelligence. Companies may hold off on potentially risky deals until the FTC is restocked, he said.
"They aren't going to be ready to jump on a transaction immediately," he said. "They are going to see who the players are. You can't play your game if you don't know your competition."
The Justice Department, which shares antitrust authority with the FTC and is reviewing AT&T Inc.'s proposed $85 billion takeover of Time Warner Inc., is still awaiting Senate confirmation of President Donald Trump's selection of Makan Delrahim to head its antitrust division. The nomination has been awaiting a floor vote for several weeks.
President Trump hasn't nominated a permanent FTC chairman or moved to fill any of its three open seats. But the vacancies haven't stopped the commission from taking action in some cases, including earlier this month when it sued to block the proposed merger of fantasy sports companies DraftKings Inc. and FanDuel Inc. It also blessed Sherwin-Williams Co.'s acquisition of fellow paint maker Valspar Corp., a deal valued at more than $11 billion.
Democratic and Republican enforcers sometimes find common ground on what mergers should be challenged, but the antitrust team in place at the end of the Obama administration was considered particularly aggressive. In 2016, for example, the Justice Department challenged two major health-insurance mergers as well as Halliburton Co.'s planned acquisition of Baker Hughes Inc.
The FTC's review of the original Walgreens-Rite Aid transaction stretched 18 months, and the commission didn't back away from concerns that the deal would have harmed competition, according to people familiar with the matter.
The commission worried about the merger's impact in regions where both companies have a strong store presence. It also had been considering whether the resulting drugstore giant -- which would have challenged CVS Health Corp. in size -- would have been able to exert unfair leverage over pharmacy-benefit managers in rate negotiations for corporate and government drug plans. Pharmacy-benefit managers, or PBM's, oversee drug-benefit plans for employers and health insurers.
In an attempt earlier this year to assuage regulators, Walgreens and Rite Aid agreed to sell up to 1,200 stores, reducing the deal price to between $6.8 billion and $7.4 billion. Under Thursday's proposal, Walgreens will buy about 2,200 of Rite Aid's stores. Previously, Walgreens planned to buy about 3,600 and the rest would be sold to regional chain Fred's Inc.
The decision to abandon their bigger merger plans indicated the companies hadn't won over the FTC's acting chairwoman, Republican Maureen Ohlhausen.
On a conference call Thursday, Walgreens Chief Executive Stefano Pessina said the smaller transaction addresses "all substantive" FTC concerns. The company will be adding stores in regions where it currently lacks a large presence, including the Northeast and MidAtlantic.
Asked whether that could be a concern for the FTC, Walgreens General Counsel Marco Pagni said, "you should assume that we have taken account of specific feedback in formulating the plan."
The transaction would still create two national drugstore chains that dwarf the next-biggest player. Walgreens has about 8,200 U.S. stores while CVS has about 9,700. The firms, however, also compete with pharmacies at grocery chains and discounters like Wal-Mart Stores Inc.
Seth Bloom, an antitrust lawyer in Washington, said the new deal still raises antitrust questions that would require FTC scrutiny, including on the issue of Walgreens' growing national muscle.
"Just because it's half the number of stores as the previous deal doesn't necessarily settle it," Mr. Bloom said. "It could make the review easier, but it's not a slam dunk yet."
Tad Lipsky, acting head of the FTC's bureau of competition, said the FTC had "evaluated a number of divestiture proposals put forward by the parties" and would review any new transaction proposed.
Walgreens said it expects $400 million in cost savings from the new deal within three to four years of closing. Walgreens will pay Rite Aid a $325 million termination fee for scuttling the larger deal.
Shares of Rite Aid tumbled 26% on Thursday while shares of Walgreens added 1.7% to $78.37. Shares of Fred's fell 23%.
Rite Aid's business has been slumping in recent quarters, falling further behind Walgreens and CVS. On Thursday, the company reported that revenue fell 5% to $7.8 billion in the quarter ended June 3 and it posted a loss of $75 million.
Rite Aid CEO John Standley said the remaining stores are more profitable, and the smaller size will leave the company less exposed to reductions in drug reimbursement rates. The company plans to use deal proceeds to pay down debt and upgrade existing stores, he said.
Asked whether he expects the FTC to approve the new deal, Mr. Standley said: "There's a chance that it won't go, that's the reality of the process. We believe it makes sense, we just have to wait until it plays out."
--Anne Steele contributed to this article.