BUSINESS

Rite Aid, Walgreens to sell stores to Fred's Inc.

Kevin McKenzie
kevin.mckenzie@commercialappeal.com

Memphis-based Fred's Inc. will be the nation's third-largest drugstore chain with an agreement announced Tuesday to buy 865 Rite Aid stores, a transaction designed to pave the way for Walgreens' bid to buy Rite Aid.

Wall Street reacted positively to the news, with Fred's stock price jumping 80 percent, up $9.04 to close at $20.09 Tuesday on the Nasdaq Stock Market.

Walgreens Boots Alliance Inc. and the Rite Aid Corp. agreed to sell the stores to ease federal officials' concerns about a $9.5 billion bid by Walgreens announced in October 2015 to buy Rite Aid and merge the two industry giants. Fred's purchase of the stores is subject to approval by the Federal Trade Commission and completion of Walgreens' acquisition of Rite Aid.

Fred's Pharmacy could be required to purchase additional stores if the FTC requires Rite Aid to shed more of its nearly 4,600 stores and Walgreens agrees to sell, according to information released by the companies.

Walgreens, Rite Aid to sell 865 stores to Fred's

The agreement requires Fred's to continue to employ all workers at acquired Rite Aid stores, as well as some field and regional employees, and to operate those stores under the Rite Aid name during a 24-month transition period.

Walgreens is in discussions with the FTC and hopes to close on its acquisition of Rite Aid in early 2017.

"The FTC is in the driver's seat here," said Rick Hans, chief financial officer for Fred's.

The companies said the Rite Aid stores that Fred's has agreed to buy are generally in the South and on the East and West coasts. Store locations won't be announced until the FTC approves the Walgreens purchase of Rite Aid.

Fred's and subsidiaries operate 647 discount stores, with 371 full-service pharmacies among them, and three specialty pharmacies in 15 southeastern states. The company has a total of about 10,000 employees and the addition of the Rite Aid stores could add an additional 20,000, according to a rough estimate, Hans said.

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"This will be a transformative event for Fred's Pharmacy that will accelerate our healthcare growth strategy through our acquisition of 865 new stores located in highly attractive markets," Michael Bloom, chief executive officer of Fred's, said in a statement.

"We believe that this transaction will also create tremendous opportunities for both our new and existing front of store and pharmacy team members. We look forward to realizing the considerable benefits this transaction will bring to our customers, patients, payors, supplier partners, team members and shareholders," Bloom said.

Hans said the companies had been in talks for several months. Fred's initially would operate as two divisions, one operating the current stores and the other Rite Aid stores, he said.

Regions Bank and Bank of America Merrill Lynch are set to provide financing for Fred's purchase of the stores.

Fred's employs about 1,000 workers in the metro area and is one of a dozen public companies in Memphis.

The company has been implementing an extensive turnaround strategy for boosting pharmacy earnings, remodeling stores and upgrading merchandise after profits slumped in 2014.

Walgreens Boots Alliance, based in Deerfield, Illinois, created by the merger two years ago of Walgreens and Boots Alliance, has more than 13,200 stores in 11 countries. Rite Aid, based in Camp Hill, Pennsylvania, has nearly 4,600 stores in 31 states.

CVS Health Corp., Walgreens and Rite Aid were the nation's three top chain drugstores by total prescription revenue in 2015, according to industry sources.

December 7, 2015 -  Discount retailer Fred's located on Getwell. (Nikki Boertman/The Commercial Appeal)