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VillageMD, the primary-care provider controlled by Walgreens Boots Alliance Inc., has agreed to acquire Summit Health-CityMD in an $8.9 billion deal that shows the drugstore operator expand deeper into health-care services to reduce its reliance on retail.
Walgreens, which has a 63% stake in VillageMD, said it will invest $3.5 billion of debt and equity to support the combination and will remain the biggest shareholder in the combined company with a 53% stake after the deal closes, according to a statement. Evernorth, a subsidiary of Cigna Corp., is also investing and will have a minority stake in the combined entity. The announcement confirms a Bloomberg News report last month that VillageMD was exploring a combination with Summit Health-CityMD.
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The deal, which is expected to close in the first quarter of next year, will create one of the biggest independent doctor groups in the US providing primary care, specialty care and urgent care, according to the statement. It gives VillageMD a deeper footprint in the New York metropolitan area, the biggest healthcare market in the country, and helps it expand into specialty care.
Walgreens said the deal will help its US Healthcare segment reach profitability sooner than previously anticipated, according to the statement.
Walgreens is pushing deeper into health care to lessen its reliance on its retail pharmacy business as online competitors like Amazon.com Inc. chip away at sales of household and beauty items. Walgreens had in past years doubled down on its retail business in contrast to CVS Health Corp. which has bought an insurer, a pharmacy benefits manager and has plans to acquire home-health company Signify Health.
Related: Walgreens CEO: We will make health care our 'new growth engine'
"This whole push into services is their effort to minimize the core pharmacy reliance and add things that are across the continuum of care and make patients and customers stickier to the Walgreens platform as a whole," Bloomberg Intelligence analyst Jonathan Palmer said in an interview.
Pharmacy chains' big moves into health care
The purchase comes as pharmacy chains, insurers and even retailers have been moving deeper into the business of taking care of patients, positioning themselves as entry points to the health-care system. UnitedHealth Group Inc., the largest U.S. insurer, has assembled a giant care-delivery arm in its Optum division with more than 53,000 physicians. And Amazon is buying 1Life Healthcare Inc., the parent of the One Medical chain of primary care clinics.
Investors can expect more consolidation as big consumer companies look to play a bigger role in looking after the health of their customers, said Neil Saunders, an analyst at research firm GlobalData.
Under Chief Executive Officer Roz Brewer, Walgreens has added primary-care centers to its US retail locations, partnered with health insurers and bought out its remaining stakes in CareCentrix and Shields Health Solutions. In October, it appointed John Driscoll, CareCentrix's CEO, as president of Walgreens's US health-care unit. That follows moves by health-care companies to combine insurance, care delivery and pharmacy assets into vertically integrated entities.
Walgreens last year agreed to more than double its stake in VillageMD to 63% from 30% by investing $5.2 billion. It first invested in the company in 2020 with a goal of building as many as 700 primary care clinics inside its pharmacies. It said last year it would increase the number to 1,000 by 2027.
Summit Health, formed in 2019 by the merger of Summit Medical Group and CityMD, has about 750 primary care providers and 1,200 specialty-care providers, while CityMD has roughly 150 urgent care locations, according to a presentation published by Walgreens. It has locations across New Jersey, New York, Connecticut, Pennsylvania and Oregon, according to its website.
Warburg Pincus, a New York-based private equity firm, acquired CityMD in 2017 and took a majority stake in Summit after the 2019 merger, according to a statement at the time.
"Summit Health-CityMD joining VillageMD is transformational for our US Healthcare segment and reinforces our intent to create greater access to quality health care across the care continuum," Brewer said in a statement. "This transaction accelerates growth opportunities through a strong market footprint and wide network of providers and patients across primary, specialty and urgent care," she added.
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