FTC Seen as Set to Block Rite Aid Deal

William McConnell Apr 19, 2017 4:51 PM EDT

Shares of Rite Aid {RAD) , Fred’s (FRED) and Walgreens (WBA) were hit Wednesday on rumors that the Federal Trade Commission is leaning towards filing a lawsuit seeking to block Walgreens planned acquisition of Rite Aid.

Rite Aid shares were down 39 cents Wednesday to $4.08, or 8.72%. Fred’s fell $1.37 to
$13.68 or 9.10%. Walgreens edged down 0.5% from a high of $83.93 earlier in the day to $83.51.

Wednesday’s reaction followed a report by specialty publication the Capitol Forum that the FTC is mulling a lawsuit to challenge the deal.

The market’s negative reaction was muted in large part because investor’s have increasingly discounted the chances that the FTC would approve the Rite Aid deal.

A government challenge to the acquisition by Walgreens would be bad news for Fred’s, a relatively unknown drug store chain based in Memphis, because it has a deal to acquire up to 1,200 Rite Aid stores that the FTC would have ordered divested as a condition of antitrust clearance for the merger of the two larger retailers. That would be be nearly twice Fred’s current 650-store footprint, mainly in small and mid-size town across the southeastern states. The purchase would presumably give Fred’s, which has a mainly rural presence, a larger footprint in urban.

Walgreens has repeatedly upped the number of stores it is willing to divest to win FTC clearance but got a dose of bad news on April 5 when the FTC took action· regarding another retail antitrust divestiture to an untested buyer that didn’t work out.

Walgreens is a holding in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells WBA? Learn more now.

The FTC sought public comment on private equity firm Sycamore Partners II LP’s wish to sell 323 Family Dollar Stores it acquired as part of Dollar Tree’s 2015 acquisition of Family Dollar Stores Inc. Sycamore Partners wants to sell them to Dollar General and says they  “can no longer operate as a viable standalone business.”

Walgreens’ plan to win FTC approval of its Rite Aid purchase, contingent upon a spinoff to Fred’s, is similar to the one Sycamore tried to make work.