Buckling under intense opposition, Rite Aid Corp. yesterday abandoned its $1.8 billion bid to buy Revco D.S. Inc., ending months of fractious negotiations with federal regulators over the drugstore industry’s largest merger.
But in a parting shot, Martin Grass, Rite Aid’s chairman and chief executive officer, accused the Federal Trade Commission of playing politics and vowed to return and fight another day.
“They were not negotiating in good faith,” Mr. Grass said, asserting that the FTC was never interested in reviewing the facts of the merger impartially and that federal regulators thwarted the chain at every turn to settle the matter.
“We just have to conclude there were people in this [Clinton] administration who didn’t want to see this transaction go through,” Mr. Grass said, suggesting that large prescription drug manufacturers had wielded influence in the process. “We were having a tough time with the FTC from the day we walked in there,” he said.
In proposing the deal, Rite Aid asserted that the merger would give the consolidated company more purchasing power, which could be passed along to consumers in the way of lower prices. In addition, with multiple stores in a single market, Rite Aid hoped to increase its competitive edge against other drugstore chains in winning contracts from prescription benefits managers, companies that refer patients to retailers for prescriptions at discounted prices.
FTC officials could not be reached for comment yesterday, but they have made their position clear: that the merger of Rite Aid and Revco, the No. 1 and No. 2 drugstore chains in the nation, would create a company so large that it would monopolize certain markets and potentially raise prices for consumers.
Reacting to the FTC’s concerns, Camp Hill, Pa.-based Rite Aid on Tuesday offered to sell off 340 stores. However, the combined company still would have operated more than 4,000 stores — including about 150 in the Baltimore market — twice those of its closest competitor, Walgreen Co.
Rite Aid had hoped to come to an agreement with the FTC yesterday, the last day in a series of extensions of the negotiating deadline. But the FTC wanted Rite Aid to divest itself of 650 to 700 stores, according to Rite Aid. When the retailer refused, federal regulators held fast to their position to file a lawsuit to block the merger — joined by several state officials who were gearing up for their own suits.
“I’ll tell you why — because this is the one merger the FTC looked at and felt [Rite Aid] could virtually control pricing,” said analyst Jeffrey Pittsburg of Goldis-Pittsburg Institutional Services in New York.
“I don’t speculate on politics,” Mr. Pittsburg said, but he noted, “Obviously they found enough evidence in their minds that this was a fight they were going to fight. Rite Aid probably saw this is not worth fighting.”
Analysts said Rite Aid had to consider the legal costs involved in what appeared to be a protracted, if not futile, battle. And the time devoted to a legal challenge could have diverted top management from running the business.
Rite Aid officials said there simply was not enough time to resolve the dispute before April 29 — when both parties, Rite Aid and Revco, could walk away from the deal without penalty.
“We have determined it’s just not feasible to litigate with the FTC at this time because of that,” said Suzanne Mead, Rite Aid’s vice president of corporate communications.
In cutting its losses, Rite Aid expects a first-quarter charge to cover the expenses associated with the proposed merger, Ms. Mead said. But “beyond that — no impact — we’ll continue to run our business, and we’ll continue to grow aggressively,” she said “We’ll have to develop our own stores, it looks like.”
That could take more time — not just for Rite Aid — but for other drugstore chains, which may be forced to look for smaller acquisitions, analysts say.
“Companies may think twice about proposing a merger, an acquisition, where both companies have a large number of stores in a market,” said Sally Wallick of Legg Mason Wood Walker Inc. in Baltimore. And for Rite Aid, she said, “they’ve got to regroup and focus on how they grow internally, with the existing business.”
Rite Aid shares closed yesterday at $29.875, down $1.75. Revco closed at $24.125, down $1.875.
Pub Date: 4/25/96
