In a rare legal challenge, federal regulators voted unanimously yesterday to block Rite Aid Corp.'s $1.8 billion acquisition of Revco D.S. Inc., jeopardizing the largest proposed merger in the drugstore industry.
But in a twist that developed just hours later, Rite Aid extended the deadline for negotiations with the Federal Trade Commission until Wednesday in the hopes of reaching a more amicable settlement.
In response, the FTC said it would honor the extended waiting period, but still intended to seek a temporary restraining order in U.S. District Court unless Rite Aid modifies the merger.
In a day of public wrangling -- or negotiating -- it amounted to this: The deal isn't dead.
"I'm not going to write it off completely," said Juan V. Noble, an analyst with Jackson Partners & Associates in New York.
At issue is whether the merger would create a company so large that it would hold sway over certain markets, hamper competition and control prices. Rite Aid and Revco -- the No. 1 and No. 2 drugstore chains in the nation -- would create a colossus with nearly 5,000 stores -- more than twice those of its closest competitor, Walgreen Co., which operates about 2,085 stores.
The FTC said states particularly affected by the merger are Maryland, Virginia, Pennsylvania, Ohio, Indiana, West Virginia, North Carolina, South Carolina and New York.
"I want to make it clear: We're interested in maintaining &r; competition and keeping prices low," said George S. Cary, deputy director of the FTC's bureau of competition.
Rite Aid appears to share the sentiment -- low prices and competition -- but from a different perspective. The retailer asserts that the merger would give the company more purchasing power, which could be passed along to consumers in the way of lower prices. In addition, the merger would help the company compete against the growing influence of managed-care companies in prescription drug sales.
The rub is the regulators and the retailer can't agree on which stores to close and -- more importantly -- how many need to be sold to satisfy the FTC's antitrust concerns about competition, analysts say.
The FTC is "sending a message to Rite Aid that merger and acquisition activity in the health care network, perhaps they're going to look tighter, more stringently," said analyst Jack Russo of St. Louis-based A. G. Edwards & Sons Inc.
Rite Aid, based in Camp Hill, Pa., announced the merger with Twinsburg, Ohio-based Revco on Nov. 30.
As part of the deal, Rite Aid offered Revco shareholders $27.50 per share in cash.
Under the offer, Rite Aid hoped to acquire 50.1 percent of Revco shares, or about 35.1 million shares, giving it a controlling interest. The offer has thus far been able to attract only about a third of Revco shares.
Under the terms of the deal, if the merger cannot be completed by April 29, both companies can walk away without penalty.
Months of fractious negotiations apparently didn't help solve the problem. Instead, observers said, both sides began to draw lines in the sand.
After the waiting period was extended several times, Rite Aid reportedly said it would not extend it beyond tomorrow. The FTC, in turn, voted 5-0 yesterday to block the merger by vowing to take the retailer to court on the day the waiting period expired.
Then, Rite Aid officials announced that they were extending the waiting period for a week, characterizing it as a mutual agreement with the FTC. The regulators didn't see it that way.
"They [Rite Aid] have chosen to do this unilaterally," said Mr. Cary of the FTC. "They informed us they were extending the waiting period."
Said Suzanne Mead, Rite Aid's vice president of corporate communications: "We have agreed mutually to extend the waiting period and are continuing to negotiate with the FTC in the hopes that we can reach a successful resolution prior to April 24."
The FTC is willing to wait, but Mr. Cary added, "We're prepared to go to court when it's timely to do so."
Revco shares fell 37.5 cents yesterday to close at $26.75 on the New York Stock Exchange. Rite Aid, which lately has been falling from a peak of $34.50 on March 7, retreated 12.5 cents to $30.875 on the NYSE.
Pub Date: 4/18/96