Rite Aid (NYSE:RAD) has been at the center of acquisition rumors for years, even before its epic return to profitability. As a business on the rebound with new-found year-over-year revenue growth, Walgreen (NASDAQ:WBA) or CVS (NYSE:CVS) might find it attractive. However, if Rite Aid's peers are interested in an acquisition, which includes companies like Kroger (NYSE:KR) and Wal-Mart (NYSE:WMT), they'll need to act fast.

Why would any company acquire Rite Aid?
Rite Aid is the third-largest pharmacy in the U.S. After six consecutive years of net losses and rising debt-to-asset ratios, Rite Aid has now reported two consecutive years of net profit. To get an idea of how rapidly this company has improved, below you can see its net income for the last four years and the company's guidance for this current 12 months.

Fiscal Year

Net Income (Loss) in millions









2015 (midpoint guidance)


In just five years, Rite Aid will show a near $1 billion differential in its bottom line. What's staggering is that the company's profit margin range from that of fiscal 2011 to what it has guided for in fiscal 2015 is only 3.6%. Essentially, this means that Rite Aid has the ability to produce a large profit with minor improvements to a business that does over $25 billion in sales per year.

Some of those improvements have come from closing and restructuring old stores. Rite Aid has worked hard to implement a wellness program in its stores, offer more organic food choices, and use better technology to educate consumers. However, new generic introductions have been the real reason why margins have exploded throughout the space, and this has been well documented.

With that said, in addition to the enormous improvements to profit, for the first time in more than five years Rite Aid is growing consistently. In its fourth quarter its revenue grew 2.2%; in fiscal 2014 it grew 0.5%; and in fiscal 2015 it's guiding for revenue growth of up to 4%. Hence, for the first time, Rite Aid is now guiding for growth comparable to and on the same level as that of its peers.

Therefore, with Rite Aid continuing to improve, it's no surprise that it's likely an attractive acquisition target and that these rumors have circulated on numerous occasions for good reason.

Which company might acquire Rite Aid?
For the reasons noted, it's clear to see why a larger company might express interest in Rite Aid. Of course, Walgreen and CVS come to mind, but then there are companies with lower pharmacy sales like Wal-Mart and Kroger that could be likely suitors.

Rite Aid has 4,600 stores in 31 states; Walgreen and CVS have 8,200 and over 7,000 stores, respectively. Thus, by acquiring Rite Aid either CVS or Walgreen could grow significantly larger and stronger and gain a bigger presence in an industry that is improving rapidly. Despite overlap in certain markets, either chain could use the additional boost in pharmacy customers. That's not to mention that Rite Aid is cheap, as it trades at 0.24 times sales versus prices at 0.69 and 0.84 times sales for CVS and Walgreen, respectively. Hence, why not acquire cheap revenue and earnings if you're Walgreen or CVS?

With that said, some have expressed concern that regulators would not allow one of the larger pharmacies to acquire Rite Aid, due to competition and pricing fears. However, unlike the situation with the telecoms, there are numerous mid-sized pharmacies in the U.S. and many of them are parts of larger companies like Wal-Mart or Kroger, which have significantly more revenues and larger presences than either Walgreen or CVS. Thus, an acquirer is unlikely to face much in terms of regulatory hurdles, which makes Rite Aid even more attractive.

Kroger and Wal-Mart are a bit different, but they are the start of a long list of large companies with presences in the pharmacy retail space. Wal-Mart has over 3,600 pharmacies while Kroger has a much smaller presence with less than 1,500 pharmacies. However, Kroger's pharmacy growth has been a major piece of its growth in recent years, and the company has expressed interest in smaller stores in the past, likely with an organic focus. Thus, Rite Aid could fit this need. As for Wal-Mart, we already know of its small-store concept; Rite Aid would definitely help boost its small-store presence.

Why is time running out?
With all things considered, Rite Aid looks ripe for an acquisition. As for investors, if a company presents a good acquisition value, then it also presents a good investment value. The only notable problem for acquirers is that Rite Aid continues to become more valuable with each passing quarter as its fundamentals continue to improve. For investors, this bodes well, and it could further signal an acquisition, and if not, continued gains.

So, just how valuable could Rite Aid become based on its guidance and its current trajectory? The answer to that question will appear in the second part of this series, "How Much Is Rite Aid's Stock Worth?". Understanding Rite Aid's "worth" makes Rite Aid look even more like an acquisition target. If this doesn't happen, investors can rest easily with the facts that Rite Aid remains cheap and its recovery story has shown no signs of ending.

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Brian Nichols owns shares of Rite Aid. The Motley Fool recommends CVS Caremark. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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