CHICAGO -- Federal antitrust regulators have requested more information from Walgreens Boots Alliance and Rite Aid in connection with the pending $17.2 billion deal to combine the drugstore chains.
The Federal Trade Commission holds the cards on how big Walgreens, based in suburban Chicago, can become. The agency generally takes a close look at any deal that reduces retail competition. Earlier this week, the FTC sued to block a planned merger between Staples and Office Depot because the agency said it would reduce national competition in the market for office supplies sold to large business customers.
Walgreens and Rite Aid said Friday they have been cooperating with FTC staff since the merger was announced at the end of October. At the time of the announcement, Walgreens CEO Stefano Pessina said the Rite Aid acquisition would not reduce competition in the distribution of drugs because there are other competitors, such as mail-order firms and specialty pharmacies.
Walgreens is willing to divest up to 1,000 stores to clear antitrust hurdles. The total would represent about 8 percent of the combined company's 12,700 stores. Walgreens has agreed to pay $9.4 billion in cash and assume Rite Aid debt in the deal, which the companies expect to close in the second half of 2016.
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But doubt is starting to creep into the market about whether the deal will be approved. Scott Mushkin, an analyst at Wolfe Research in New York, said in a research note issued Thursday that the merger "seems to go against the spirit of antitrust laws in the U.S."
He cited four reasons why the planned merger might be in trouble. It appears to create significant market concentration, a unilateral reduction in competition, a reduction of choices for both drug plans and consumers, and the potential for a significant transfer of wealth from drugmakers to the combined company, Mushkin wrote.
Walgreens would have national market share of more than 35 percent after the planned acquisition, Mushkin said. In several big cities, Walgreens and CVS would have more than 70 percent share, including Boston, 84 percent; New York, 82 percent; Philadelphia, 76 percent; and San Francisco, 75 percent, according his analysis.
Mushkin also said the government will examine Walgreens' corporate history of disputes with pharmacy benefit managers -- companies that oversee drug plans for large employers and insurance companies -- over reimbursement rates. Walgreens' increased market share would appear to give it more negotiating leverage with pharmacy benefit managers, which pay the drugstore chain to process prescriptions for consumers.
If processing fees increase, consumers could face higher costs, Mushkin said.
A Walgreens spokesman didn't immediately respond to a request for comment on the report.