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Walgreens Likely To Go on Real Estate Diet if Deal for Rite Aid Wins Approval

Rite Aid Accepts $17.2 Billion Buyout Offer from Walgreens Boots Alliance, Execs See $1 Billion in Cost Savings
October 28, 2015
The newly announced merger agreement between Walgreens Boots Alliance Inc. and Rite Aid Corp. has the potential to have a hugely disruptive impact on the retail real estate landscape, according to industry experts analyzing early details of the proposed deal.

Such a combination would likely leave shopping center owners grappling with hundreds or perhaps up to a thousand redundant store closings. The large number of spaces that could go dark as a result of a merger would also have other far-reaching effects through co-tenancy clauses that allow other tenants to opt out of their lease if a major store in their shopping center closes.

Walgreens and Rite Aid, the second and third-largest drug store chains respectively, reached a deal under which Walgreens agreed to acquire Rite Aid for a total enterprise value of $17.2 billion, including acquired net debt. The two drug store operators control roughly 200 million square feet of retail space and another 21 million of office and distribution space.

In announcing the agreement, Walgreens Boots Alliance Executive Vice Chairman and CEO Stefano Pessina said the two retailers already have identified more than $1 billion in costs savings, largely from closing redundant stores and gaining distribution channel efficiencies.

Down to a Two-Horse Drugstore Race


If the merger is approved, it would leave Walgreens and CVS as the two dominant drugstore chains in the country. Walgreens Boots Alliance has more than 13,100 stores in 11 countries, with more than 8,300 in the U.S. The company includes one of the largest global pharmaceutical wholesaler and distribution networks with over 11 million square feet of distribution centers in the U.S. and 3 million square feet of office space. Rite Aid has nearly 4,600 stores in 31 states and the District of Columbia.

"This will be a big one," said Garrick Brown, vice president research for Cushman & Wakefield. "Assuming they get approval from the FTC to merge, which I expect they will, this will mean a lot of real estate will be coming back to the market. I wouldn't be surprised if they had to divest as many as 1,000 stores or more just to make the deal happen."

The merger could also cause a significant 'ripple effect' in retail centers where other tenants have co-tenancy clauses. Under certain conditions, these clauses allow stores to opt out of their lease should the main drug-store anchor in their center close.

"To make matters worse, shopping center owners with loans secured by their properties run the risk of having their loans possibly put into default, or causing a 'trigger period' in the loan because of a major tenancy clause, or possibly lowering debt service coverage ratios below the level the loan allows," said Jack Miller with Florida-based GFCIB and Advisors. "For owners of centers, there can be bigger implications than just a store vacancy."

Where Store Closures Most Likely to Take Place


If Walgreens and Rite Aid are allowed to merge, the stores most likely to be closed are those with sales that chronically underperform, or those that cannibalize sales from each other, notes Cushman & Wakefield's Brown.

Walgreens' average sales per square foot are typically higher than Rite Aid's within the same markets, according to Brown and others.

Also, Brown points out that Rite Aid has a lot of older stores in larger formats that have fallen out of favor within the drugstore industry.

An analysis of research data compiled by CoStar found that the two drugstore chains have more than one location in nearly 3,100 ZIP codes across the country. Together they have more than four store locations in 410 ZIP codes.


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