M&A Roundup: Ascension to Acquire Wheaton Franciscan Health, Walgreens Buying Rite Aid

The Wheaton acquisition strengthens Ascension's market share in Wisconsin. Meanwhile, federal antitrust scrutiny of the Walgreens-Rite Aid combination is likely to come down to a city-by-city review.

Ascension, the nation's largest nonprofit health system, is getting bigger.

The St. Louis-based Catholic health system announced that its Wisconsin subsidiary has signed a letter of intent to acquire Wheaton Franciscan Healthcare in Glendale, WI. The deal is expected to be finalized by March 2016.

When completed, Ascension Wisconsin will comprise 27 hospitals and 150 clinics employing more than 24,000 associates, including 1,000 medical group physicians, bringing in $3.5 billion in annual operating revenue.

For Wheaton Franciscan, the deal ensures a continuation of its mission. "This decision came after a lengthy discernment process by the Sisters as we are aging and our numbers are getting smaller in the United States," Sister Pat Norton, Chair of the Sponsor Member Board for Wheaton Franciscan Healthcare, said in prepared remarks.

"We wanted to transfer our corporate ministries while these ministries are healthy, fiscally sound, and have a strong sense of mission and values. The choice to transfer our ministries ensures that the needs of the times will continue to be addressed in each community, as the Sisters have worked to do for more than 140 years," she said.

Allan Baumgarten, a consultant and veteran observer of health system dynamics across the Midwest, says Ascension has been building its Wisconsin presence for several years, starting with Columbia St. Mary's hospitals in the Milwaukee area.

"After Ascension acquired the Ministry Health Care hospitals a few years ago, it became the second-largest hospital system in Wisconsin, although I don't think they are operating as an integrated system yet," Baumgarten says. "Both Columbia St Mary's and Ministry are participating in Integrated Health Network of Wisconsin, the 'everyone but Aurora' delivery network that is seeking to contract directly with health plans and employers."

"Based on my 2014 Wisconsin Health Market Review (2013 hospital data), Ascension had 8% of the southeast Wisconsin hospital market with its Columbia St. Mary's hospitals," Baumgarten says. "If you add the Wheaton Franciscan hospitals in the Milwaukee area—21.3% of the SE Wisconsin market—the combined system is almost 30% of that region. Aurora had 32.9% of the SE Wisconsin market in 2013."

Beyond Wisconsin, Baumgarten says Ascension has been expanding gradually across the Midwest with acquisitions that include Alexian Brothers Health System in the Chicago area and a joint delivery network with the Trinity Health hospitals in Michigan.

Wheaton hospitals in Southeast Wisconsin include five acute-care hospitals and two specialty hospitals, Midwest Spine and Orthopedic Hospital and Midwest Orthopedic Specialty Hospital (a joint venture). The region also includes Wheaton Franciscan Medical Group, with more than 300 physicians in more than 50 locations, a network of outpatient centers, three transitional and extended care facilities, and home health and hospice operations. ?

Walgreens Details Rite Aid Acquisition

Walgreens Boot Alliance says it would divest as many as 1,000 stores with a value of $100 million in its $17.2 billion acquisition of rival Rite Aid Pharmacy if that's what it would take to clear federal antitrust hurdles.

If finalized early next year, Walgreens would acquire 4,570 Rite Aid stores in 31 states, added to the more than 8,200 stores Walgreens already operates, with combined revenues of more than $100 billion annually. Combined Walgreens and Rite Aid would control more than 46% of the $216 billion retail pharmacy market.

Woonsocket RI-based CVS Health, the nation's second-largest retail pharmacy chain, operates more than 7,800 stores, but has also made a concerted push into the pharmacy benefits arena since the 2007 acquisition of Caremark.

In a Form 8-K filing with the Securities & Exchange Commission, Walgreens also said that if it walks away from the deal, it will pay Rite Aid as much as $650 million in termination fees, while Rite Aid would be liable for $325 million in termination fees if it backs out.

In a conference call with analysts, Walgreens Boot Alliance CEO Stefano Pessina expressed confidence that the deal would pass regulatory review.

"We have not done this to increase our negotiating power with payers and [pharmacy benefits managers]," Pessina says. "We have done this because we believe that we can extract a lot of synergies. We are not thinking of really improving our position with the payers because at the end of the day we are in an environment where the margins are decreasing."

Pessina says the retail pharmacy market is flourishing and highly competitive.

"The fact that we put together two companies will not reduce the competition—not just the competition among pharmacies," he says. "Think of other tandems, think of the mail-order, think of the people who are specialized in certain categories. There are many people working this area. I don't believe that these will really give up [because of the Walgreens-Rite Aid deal]. But we have not counted on that when we have put together our numbers."

Jay Levine, an antitrust attorney with Porter Wright's Washington, DC, office, says the Federal Trade Commission will give the deal a localized review.

"What do they say in real estate? Location, location, location! It's going to be somewhat market-specific," Levine says. "They are going to look at market overlaps in various regions, and regions can be a neighborhood, a city, and the like. They are also going to evaluate whether [the combined entities] are going to have too much power on the buying side, such that they can affect competition from the buying side."

"You also have the convenience store side of things, where they compete with big grocers, all of whom have their own pharmacies. I am sure those are all going to be pointed out as competitive constraints," Levine says. "In various market it may be, and in others there may be too much concentration, so they may have to divest. I suspect at a fundamental level it will come down to geographic market by geographic market. What is the level of concentration? It is going to devolve almost city by city."