The Walgreens-Rite-Aid deal could help make the combined company bigger than CVS. (Photo: Allison Bell/LHP)

(Bloomberg) — Walgreens Boots Alliance Inc.’s plan to win U.S. antitrust clearance for its acquisition of Rite Aid Corp. hasn’t satisfied officials at the Federal Trade Commission, according to people familiar with the matter.

With just a week left before the companies’ deadline to complete the deal, FTC lawyers aren’t sold on Walgreen’s proposal to sell 865 drugstores to Fred’s Inc. to get approval to take over Rite Aid, said two people, who asked not to be identified because the discussions are confidential.

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That runs counter to the sentiment of investors, who have grown optimistic that the deal will get done. The spread between Walgreen’s offer price of $9 a share and Rite Aid’s current price has fallen to less than 50 cents from a high of $2.57 reached on Nov. 3.

The $9.4 billion transaction would merge the No. 2 and No. 3 pharmacy chains in the U.S., vaulting the combined company past CVS Health Corp. to become the leading drugstore chain by number of stores. It would also expand its prescriptions business. FTC officials are concerned the sale doesn’t go far enough to preserve competition that would be lost in the tie-up, one of the people said. It isn’t clear whether the staff has made a formal recommendation, that person said.

Breakup fee

The commission is unlikely to complete its review by the companies’ Jan. 27 deadline to close the deal, the second person said. If the deal doesn’t win antitrust clearance, Walgreens would have to pay Rite Aid a termination fee of $325 million or $650 million “in certain circumstances,” according to a company filing.

In October, Walgreens said it was “confident” it would close the deal early this year as it postponed the merger deadline from Oct. 27 because its discussions with regulators were taking longer than anticipated.

Spokesmen for Walgreens, Rite Aid and the FTC declined to comment. Fred’s chief financial officer Rick Hans, reached by phone, declined to comment.

The FTC has been scrutinizing the proposed tie-up for more than a year. The review continues as the agency is poised to be reshaped under the Trump administration. Trump will have three empty seats on the commission, including the chairman’s post, to fill after Chairwoman Edith Ramirez steps down on Feb. 10.

Trump transition

Trump’s FTC advisor for the transition is Joshua Wright, a conservative law professor with a laissez-faire approach to antitrust enforcement who says mergers rarely harm consumers and can often generate benefits for consumers — including lower prices and higher quality.

Under the Obama administration, the FTC has paid particular attention to competition in the health care sector to protect consumers, targeting hospital mergers and deals that postpone the market entry of generic drugs.

Related: Class decertified in mail-order pharmacy antitrust case

The FTC carefully assesses buyers of assets to determine whether the acquirer can restore competition. It hasn’t always made the right call. Divestitures ordered by the FTC in Albertsons Cos. takeover of Safeway Inc. and Hertz Global Holdings Inc.’s acquisition of Dollar Thrifty both failed.

In 2014, the FTC ordered Hertz to spin off its Advantage Rent A Car business to a company owned by an industry veteran and Macquarie Capital. Four months after the commission closed its investigation and signed off on the acquisition, Advantage filed for bankruptcy.

The buyer of divested supermarkets in Albertsons’ takeover of Safeway collapsed after acquiring those stores.

CVS Chief Financial Officer David Denton said at a conference earlier this month that Fred’s won’t be a viable competitor over time.

Related:

Walgreens U.S. sales weaken as cost cuts help beat estimates

CVS beats estimates as Omnicare acquisition drives sales

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