In The Headlines

Feds Signal “Big, but not Too Big” on Walgreens, Rite Aid Deal

It now appears that drugstore chain Walgreens Boots Alliance would likely have to divest between 500 and 1,000 stores, more than its previous estimate of fewer than 500, to ease antitrust concerns over its pending $9.41 billion acquisition of Rite Aid and win regulatory approval. The deal, if completed, would make the nation’s largest drugstore chain even larger. The company says it remains “actively engaged” with the Federal Trade Commission as it reviews the deal.

Federal regulators appear increasingly hesitant to approve major acquisitions after a record-setting pace last year in megadeals. They have already sued to block two multibillion-dollar health insurance tie-ups this year, the proposed combinations of Anthem Inc. and Cigna Corp., and Aetna Inc. and Humana Inc.

Walgreens Boots Alliance Inc. runs 8,173 U.S. stores, a total that could top 12,000 with the acquisition of Rite Aid Corp., based in Camp Hill, Pa. The deal, announced last October, could include divestiture of up to 1,000 stores if needed, but Walgreens has said it still expects to unload fewer than that.

The combination of the nation’s largest and third-largest drugstore chains would give Walgreens beefed-up negotiating muscle with drug makers and other suppliers, and enlarge its presence in the Northeast and in Southern California. It would also put Walgreens in head-to-head competition with both rival CVS in a number of markets (CVS Health Corp. runs more than 9,600 retail pharmacies), and with thousands of independent drugstores.

Alex Gourlay, Walgreens Boots Alliance’s executive VP and Walgreens president, recently laid out Walgreens’ strategy and discussed how the Rite Aid acquisition would play a role. Walgreens is focusing less on consumables and general merchandise and more on higher margin, branded health and beauty products, as well as offering customers a more consultative shopping experience. “Customers in the U.S. don’t always see us as a beauty retailer,” Gourlay said, suggesting there is significant upside in converting those shoppers, who are already there picking up prescriptions, into Walgreens beauty shoppers. He also reported that one space-friendly category, not associated with health and beauty, which has proven to be a great success is photo. While just about everyone else has left the photo business for dead, Walgreens has reclaimed that business as a profit generator by incorporating photo printing capabilities into a number of smartphone apps. “It’s a great innovation that is really allowing us to personalize that category,” Gourlay said. Walgreens recent incorporation of Apple Pay into its Walgreens Balance Rewards loyalty program is another example of how the retailer is investing in omnichannel engagement. “There is an opportunity to connect that more holistically into the whole of the Walgreens stake going forward,” he said.

According to Gourlay, Walgreens will be able to deliver that differentiated front-end shopping experience to a greater degree across the Northeast and California markets with the Rite Aid acquisition. “Walgreens is very strong in the middle of the country and Rite Aid has a really complementary footprint, which allows us to become strong in all these most-important markets,” he said. “We think that will be important given the consolidation of other channels and given also the consolidation in other parts of the supply chain.”

Gourlay commented that Rite Aid possesses an innovative corporate culture that will complement Walgreens’ marketing and merchandising initiatives. “We’ve also got some great ideas from the Rite Aid team,” Gourlay said. “We think that the best from Europe, the best from the Walgreens team here in the USA and the best from Rite Aid in the USA will truly give us a new model going forward that will sustain growth into the future,” he added.

Citations

1. http://for.tn/2cFVvXu – Fortune
2. http://bit.ly/2cFVuCR – Chain Store Age

Private Prisons: Too Many Cells and Not Enough Prisoners

With overall violent crime rates falling nationally and fewer people getting sentenced to long stretches behind bars, private prison companies see a potentially catastrophic decline in demand for their services. Their response has been to diversify into everything from halfway houses to neighborhood check-in centers for drug offenders.

Over the past three decades, entrepreneurs and investors piled into the private prison industry convinced that the job of incarcerating criminals could be a lucrative growth business. No longer. Curtailment of harsh mandatory-minimum sentences and other changes in criminal justice policies have combined to cut federal and state inmate head counts to 1.5 million as of yearend 2015. That is down from 2.4 million in 2008, a 38% reduction. In recent weeks, the two publicly traded U.S. private prison operators, Corrections Corp. of America (CCA) and Geo Group, have felt the effects of a shrinking market. On Aug. 29, the U.S. Department of Homeland Security announced it would review whether to end its use of privately contracted facilities for detaining criminal aliens and other illegal immigrants. Just 11 days earlier, the U.S. Department of Justice said more definitively that it would begin phasing out private prisons.

About half of the annual revenue reported by the companies “may be at risk” after the federal government announcements, according to an analysis by Bloomberg Intelligence. Both companies have major immigration detention contracts due to expire within the next eight months. Those deals alone have generated $520 million for Nashville-based CCA and $228 million for the smaller Geo, which is headquartered in Boca Raton, Fla. So far, state-issued private prison contracts appear to be more secure because state penal systems remain more crowded than their federal counterparts.

Yet that has not been enough to reassure investors. Since the Justice Department announcement, shares of CCA and Geo have each sunk by more than 30%, thus the drive for diversification. Most people enmeshed in the criminal justice system are not held in prison or jail, but instead are overseen by some form of “community corrections.” That catchall term refers to several kinds of institutions: halfway houses, where some inmates go near the end of their sentences; “intermediate sanctions facilities,” which oversee released offenders who violate the terms of their probation or parole; and day-reporting centers for people sentenced to rehabilitative drug-treatment or employment-training programs, rather than traditional imprisonment. There were 4.7 million adult offenders on probation or parole as of the end of 2014, the most recent figure available. That number is down 7.8% from seven years earlier, but is still far larger than the prison population, and the decline has been much slower.

“We kind of read those tea leaves six years ago and began planning the move toward community corrections,” says Tony Grande, CCA’s Chief Development Officer. The strategy shift has been justified, he adds, as prison populations have shrunk and government customers have indicated they want large private providers to offer less punitive, shorter-term facilities that are less like traditional prison and more like community-based operations that include rehabilitation opportunities. Grande points to a footnote to the Aug. 18 Justice Department memo instructing the Federal Bureau of Prisons to wind down its use of full-scale private prisons. The note emphasized that the department will continue to pay private companies to operate “hundreds of community-based residential reentry centers, or ‘halfway houses,’ across the country.”

CCA has diversified into community corrections through acquisitions, buying its first halfway house in San Diego three years ago. Today it owns 25 such facilities with a total of 5,000 beds in six states. More deals are in the pipeline, Grande says. “We have really ramped up and have had a lot of growth here in a short period of time,” CCA’s Chief Executive, Damon Hininger, told industry analysts in an Aug. 19 teleconference responding to the federal cutbacks. Growth by acquisition will continue, CCA executives say. Historically, small local operators, many of them family-run, have owned most community corrections properties, so what’s going on now is the beginning of a consolidation of that piece of the market. Geo has been moving in the same direction “for several years,” its Vice President for Corporate Relations, Pablo Paez, said via e-mail. The company says it has more than 20 residential reentry centers and about 60 day-reporting facilities, serving about 7,000 offenders a day.

Skeptics of private prisons say they are worried about the trend toward larger contractors buying up mom-and-pop community corrections companies. In a report published in August, the American Friends Service Committee, a peace and social justice organization, warned that the bottom-line focus of publicly traded corporations will undermine the reformers’ goal of “shrinking the size and scope” of the criminal punishment system. “While the best practices in the area of community corrections emphasize tailoring interventions to provide the lowest level of security or surveillance necessary for the shortest amount of time,” the Friends committee added, “the incentive for private prison companies is to ‘widen the net’ of people under ever-increasing levels of control.” Grande disagrees. “To reduce populations, we’ve got to find a way to reduce recidivism in this country,” he says, and CCA is already seeking to do that with rehabilitative programs it runs in its prisons. “If the needs change, we have to change.”

Citations

1. http://bloom.bg/2bW85zI – Bloomberg
2.  http://read.bi/2c9fxtF – Business Insider

The Good News Is . . .

• Purchase applications rose 1.0% in the week of September 2 after posting the same gain in the previous week, with the year-on-year gain increasing by 2 percentage points to 7%. Low rates continue to encourage applications to refinance, which also increased 1% in the week as the refinancing share of mortgage activity gained 0.5 percentage points to 64.0%. Rates were marginally higher from the previous week but still near record lows, up 1 basis point at 3.68% as the average interest rate for 30-year fixed-rate mortgages of conforming loans ($417,000 or less).

• The J. M. Smucker Co., a leading marketer and manufacturer of consumer food and beverage products, reported earnings of $1.86 per share, an increase of 16.3% over year-earlier earnings of $1.60 per share. The firm’s earnings topped the consensus estimate of analysts by $0.12. The company reported revenues of $1.8 billion. Management attributed the results to the strength of its brand portfolio and improved operating margins.

• Liberty Media, a cable television conglomerate with stakes in Charter Communications, SiriusXM radio and the Atlanta Braves, announced a $4.4 billion deal to purchase the 67-year-old racing series Formula One from a group led by CVC Capital Partners, a Luxembourg-based investment fund. With more than 400 million global viewers, Formula One is among the world’s most popular sporting organizations. But it has struggled to break into the American market, where other racing series, in particular NASCAR, reign supreme. But Formula One’s American television audience has grown by 40% since NBC Sports took over the domestic broadcast rights in 2013. The surge of interest occurred as another traditionally international sport, soccer, has also taken off in the American market.

Citations

1. http://bloom.bg/1Dl6vPO – Bloomberg
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/2cGg20V – The J.M. Smucker Co.
4. http://nyti.ms/2cIWA4Q – NY Times Dealbook

Planning Tips

Guide to the Costs of Caring for Elderly Parents

Nearly 10 million people over the age of 50 are caring for their aging parents, according to a study conducted by the MetLife Mature Market Institute, in conjunction with the National Alliance for Caregiving and the New York Medical College. The number of caregivers has more than tripled over the past 15 years. In a recent survey, the National Alliance for Caregiving and Evercare, a division of United Healthgroup, found that caregivers in the U.S. spent an average of $5,531 a year looking after an elderly relative who lived with them. That was more than 10% of the median household income of the caregiver, which was $43,026. While home care is almost certainly cheaper than a nursing home or an assisted living facility, if you are sheltering an elderly parent you should prepare yourself for these costs. Below are some of the costs you are likely to encounter.

Medical equipment – If an elderly parent who moves into your home is sick or incapacitated, chances are he or she will need some medical equipment to live comfortably and safely. The equipment needed–and what it costs–will vary from person to person and depend on medical conditions and health. Some typical home medical devices and their average costs include a hospital bed ($600 to as much as $10,000), a wheelchair ($150 for a basic model and up to $10,000 for a motorized one), bed pans ($40 to $125) and walkers ($30 to $200).

Home healthcare – Home healthcare is also expensive. The American Association of Retired Persons (AARP) and the MetLife Mature Market Institute estimate that the average salary of a home health-care aide is $21 an hour. Financial assistance to help cover these expenses may be available through some Medicaid plans and private insurance plans provided by an employer. If your parent has long-term care insurance, some of these costs may be covered.

Prescription drugs – Americans often pay more for prescription drugs than anywhere else in the world, and those prices continue to rise. According to the American Association of Retired Persons (AARP), the average cost of prescription drugs in the U.S. doubled between 2006 and 2013. The typical American senior spent $11,341 on prescription drugs in 2013, up from $5,571 in 2006. Making matters worse, prescription-drug costs in the U.S. tend to be volatile and subject to sudden price increases. Prices for many widely used medications were significantly lower at stores such as Walmart and Costco than at drugstores such as Walgreens. And, of course, costs can also be managed by purchasing the generic form of a medication when possible.

Safety equipment – Medical equipment is not the only thing needed to keep elderly parents safe. You may also be required to outfit your house with safety equipment. This can include everything from a wheelchair ramp and handrails in the shower to a second handrail on the stairs and timers on the lights. These kinds of assistive devices, while not as expensive as medical equipment, still add up. A bench to sit on in the shower, for example, can cost anywhere from $40 to $130. Handrails for the shower range in price from as little as $16 to more than $150; handrails to help people get on and off a toilet cost from $55 to nearly $400. Amplified telephones for people who are hard of hearing can cost more than $250. Keep in mind that much of this safety equipment, as well as medical supplies, can be rented from companies for set periods rather than purchased outright. Also, many of the costs associated with being a caregiver are tax deductible under the Internal Revenue Service’s senior tax credit.

Dietary needs and restrictions – When taking in an elderly parent, you are also taking on another mouth to feed, one who often has unique dietary needs and food restrictions. This can result in having to shop for specialty food products, causing a hefty increase in the monthly grocery bill. Seniors may also need nutritional supplements, as well as vitamins. Food and nutrition costs can add up fast. A monthly calcium supplement, for example, can cost anywhere from $7.50 to more than $40. As always, it is advisable to shop around and compare prices. Also, if you are not already a member of a warehouse club such as Costco or Sam’s Club, you may want to investigate the benefits of joining and buying groceries in bulk.

Citations

1. http://bit.ly/2caMvs8 – AARP
2. http://bit.ly/1XntZQA – Interest.com
3. http://bit.ly/2cJuu9D – Investopedia
4. http://n.pr/2cG4F66 – NPR
5. http://nyti.ms/2c9lSF8 – NY Times