Walgreens (WBA - Get Report) and Rite Aid (RAD - Get Report) said Monday they have given the Federal Trade Commission until July 7 to reach a decision on their pending merger, which the commission has been giving antitrust scrutiny since December 2015.
The companies announced they have certified substantial compliance with the FTC's second request for information on their merger plans. Certifying substantial compliance puts antitrust enforcers on a deadline for either clearing a merger or filing a lawsuit asking a judge to stop the deal. Typically the deadline is 30 days but in January 2016, Walgreens and Rite Aid entered an agreement with the FTC pursuant to which the two companies have agreed not to close the merger until at least 60 full calendar days after both companies certified substantial compliance.
A number of signs indicate the FTC is inclined to filing a lawsuit seeking to stop the transaction.
Walgreens has offered to divest to Fred's (FRED - Get Report) , a drugstore chain based in Memphis, hundreds of Rite Aid stores. Fred's has agreed to acquire up to 1,200 Rite Aid stores if the FTC orders that many divested as a condition of antitrust clearance for the merger.
That would be be nearly twice Fred's current 650-store footprint, which is mainly in small and mid-size towns across southeastern states. The purchase would presumably give Fred's, which has a mainly rural presence, a larger footprint in urban areas.
Rite Aid shares fell Monday to $4.05, a drop of 0.06 cents, or 1.46%. In after-hours trading following disclosure of the FTC's new deadline, Rite Aid shares rose to $4.15, a 2.47% climb from the closing price.
Fred's shares rose 4 cents to $14.95 and were unchanged after hours.
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. 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."
On April 27 the FTC granted Sycamore's request.
Sycamore has been running the stores as the corporate entity Dollar Express LLC but retained the Family Dollar signs on the storefronts.
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 --t he stores Fred's acquires would retain the Rite Aid banner for two years.
Walgreens agreed to acquire Rite Aid for about $9.7 billion back in October 2015. Originally the company said they would have to divest roughly 500 stores. But when the plan to shed stores to Fred's was announced in December 2016, they said they would divest 865 stores.
But the FTC said even that divestiture would not be enough. The number of divested Rite Aid stores has since swelled to around 1,200 but the FTC has yet to approve the deal.
The Fred's deal is worth approximately $950 million.
The critical issue for Walgreens is whether the FTC can be convinced Fred's can acquire so many stores and operate them successfully.
Also weighing on the outcome of the merger is the debacle that followed when the FTC allowed Albertson LLC to sell 146 stores to Haggen LLC, another small chain store, as a condition of antitrust approval for Albertson's 2015 purchase of Safeway. But instead of flourishing, Haggen filed for bankruptcy.
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This story was originally published at 11:05 pm ET and has been updated.