By Paul Ziobro

Walgreens Boots Alliance Inc. and Rite-Aid Corp. moved a step closer to consummating a $9.4 billion merger that would leave the U.S. dominated by two retail pharmacy chains.

Under pressure from antitrust regulators, the merger partners said Tuesday they agreed to sell 865 Rite-Aid locations, leaving the proposed combination with just under 12,000 stores.

The buyer? A regional chain called Fred's Inc., which had just $5.7 million in cash and has been losing money and closing stores.

Fred's has secured $1.65 billion in borrowings to fund the all-cash, $950 million purchase plus ongoing operating costs. It has pledged nearly all its assets as collateral for the loans, including prescription files, real estate and furnishings, according to a regulatory filing.

The transaction would more than double the Memphis-based company's size. Fred's had 650 stores as of Oct. 29 -- about half had pharmacies -- and had a market cap of about $400 million before the deal was announced.

Fred's shares surge 75% to $19.49 in Tuesday morning trading. Analysts at Leerlink Partners said the company was getting a good price for the stores it is purchasing, noting Fred's is paying about seven times earnings before interest taxes and depreciation. Leerlink estimated the stores average about $5.5 million in annual sales apiece.

The transaction would give the company a broader reach, but it would still be dwarfed by the Walgreen-Rite Aid as well as CVS Health Inc., which has 9,600pharmacies.

Write to Paul Ziobro at Paul.Ziobro@wsj.com

(END) Dow Jones Newswires

December 20, 2016 11:46 ET (16:46 GMT)

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