But what if the deal actually takes place? Who would stand to benefit?
First, let's deal with this question: Why would Walgreen undertake such a merger? Walgreen recently split up with its pharmacy benefits manager, Express Scripts
Last year Express added $5.3 billion to Walgreen's pool, which was essentially 7% of the total amount that Walgreen brought home. So, no wonder Walgreen might be in the market for a new source of revenue.
Why the merger makes sense
If the merger takes place, it'll create a huge new drugstore as the first- and third-largest dedicated drug chains would join forces. The two together would then be able to push back against pharmacy benefits managers, or PBMs, from pushing down the compensation received for drugs. This is especially relevant as Express Scripts is in the midst of an attempted a merger with Medco Health Solutions
Rite-Aid brings to the table close to 4,700 stores across U.S., as well as 71,604 employees. Last year, the company's top line was $25.4 billion -- and there's your source of revenue for Walgreen. According to Mr. Kelly, the alliance would save between $400 million to $650 million in synergies. The combined entity could fill 30% of overall prescriptions, as well as 21% of all pharmacy counters. So together they can generate huge returns and bring in plenty of green.
All can't be good...can it?
We've seen the pros, so let's consider the cons. According to Kelly, the tie-up is not without risk. The friction points might be:
- Walgreen would have to deal with a substantial 60% increase in its store base. Also, "Rite Aid has many sub-par locations, and most stores need a large capital injection."
- A deal would result in Walgreen's credit rating being cut unless the retailer chooses to fund for the deal with equity.
- Walgreen will end up acquiring over 71,000 Rite-Aid employees, of which nearly 30% are unionized. Walgreen would be forced to deal with labor negotiations.
Overall, Kelly concluded, "Ultimately, the deal might carry too many risks for a traditionally conservative Walgreen."
It's a sticky situation, but one thing is clear: Walgreen must look for a new source of growth -- either organic or inorganic -- or run the risk of an eroded market share. In fact, peer CVS Caremark
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Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. Motley Fool newsletter services have recommended buying shares of Medco Health Solutions. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.