Walgreens Boots Alliance Inc.'s (WBA) - Get Report  move Thursday to terminate its $9.4 billion merger with Rite Aid Corp. (RAD) - Get Report  so it can seek to buy about half its stores also means a related deal to sell hundreds of drug stores to Fred's Inc. (FRED) was terminated.

The move has driven down the shares of Fred's by 22% to $9.42 on Thursday morning, a major hit to the small drug chain and two activist investors and other shareholders betting that all the deals would be consummated.

Fred's recently beefed up its board to show the Federal Trade Commission that it could acquire as many as 1,200 Rite Aid stores that the agency may have ordered divested as a condition of antitrust clearance for the Walgreens-Rite Aid deal. The acquisition would have roughly tripled the size of Fred's, which has 601 pharmacy and general merchandise stores. Fred's stock surged in December after Walgreens announced it was offering to sell Rite Aid stores as a condition of getting regulatory approval for the deal.  

However, Rite Aid and Walgreens moved to terminate their merger, likely under expectations that the FTC was going to come out ultimately against their blockbuster deal. It instead agreed to set up a deal for Walgreens  to buy 2,186 Rite Aid stores, which kills the Fred's deal. 

The move is a major hit to two activist investors who have accumulated a significant stake in Fred's.

Sometimes activist fund Alden Global Capital, which owns about a 25% stake in Fred's, settled with the drug store chain in April to add two directors to the company's board as part of its effort to demonstrate it could absorb the new stores.

In addition, it is also likely a major hit to activist investor David Einhorn of Greenlight Capital, who revealed a stake in Fred's in February. According to the latest 13-F filing, Greenlight Capital owns approximately 2.1 million shares. The firm also holds a large position in Rite Aid, about 16.8 million shares or about 1.6%, suggesting Einhorn believed that the Walgreens-Rite Aid deal would be completed. Rite Aid shares were also down about 21% to $3.10 in premarket trading. The cancelled deal is the latest hit to Einhorn, who failed in his effort to get directors installed onto the board of General Motors  Co. earlier this year.

Regulatory observers have frequently questioned whether Fred's was ever in a position to be able to absorb as many stores as many expected it would have been required to take on to allow the Rite Aid-Walgreens deal to be completed.

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For example, the FTC in April 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. Sycamore said they could "no longer operate as a viable standalone business." The FTC's examination of problems associated with that divestiture suggested that they may have been having concerns about potential Fred's divestitures.

The move to terminate the deal also comes after Fred's adopted a short-term "poison pill" to limit any one fund from accumulating a stake larger than 10% of the company. The move comes following increasing volatility related to its participation in the transaction.

Fred's said it was a "disappointing outcome" but will have no impact on the drug store chain's "transformation strategy" or its ability to execute it.

"We are as confident as ever that we have a strong team and the right strategy in place to drive long-term growth and profitability, and to enhance value for our shareholders. We are excited about what we have accomplished and are optimistic about the future," said Fred's CEO Michael Bloom. In addition, Fred's said it will receive $25 million as reimbursement for expenses associated with the terminated transaction.

Fred's said it was a "disappointing outcome" but will have no impact on the drug store chain's "transformation strategy" or its ability to execute it. "We are as confident as ever that we have a strong team and the right strategy in place to drive long-term growth and profitability, and to enhance value for our shareholders. We are excited about what we have accomplished and are optimistic about the future," said Fred's CEO Michael Bloom. In addition, Fred's said it will receive $25 million as reimbursement for expenses associated with the terminated transaction.

Walgreens Boots Alliance 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.

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