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Can Rite Aid Stock Keep Going After Last Week's 9% Pop?

By Rick Munarriz - Apr 9, 2017 at 9:13AM

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Shares of the drugstore chain move higher as the rocky proposed buyout between the two parties shows signs of life.

Most stocks tend to be steady if not boring after their companies agree to be acquired, but that has certainly not been the case with Rite Aid (RAD 7.95%). Shares of the drugstore operator rose 9.2% last week, after aspiring acquirer Walgreens Boots Alliance (WBA 1.86%) voiced continued support for the proposed buyout and a report suggested that outsiders may play a part in making it happen.

Walgreens and Fred's (FRED) -- another important player in this pending acquisition -- reported earnings last week, and both made encouraging public comments in support of the deal. 

"I am still optimistic that we will bring this deal to a successful conclusion," Walgreens CEO Stefano Pessina said during the drugstore giant's earnings call. He pointed out that Walgreens is "constantly and currently collaborating" with the Federal Trade Commission (FTC) to gain regulatory approval for the transaction ahead of the recently revised end-of-July deadline.   

Fred's also stepped up in support of the deal. It was originally supposed to buy 865 redundant Rite Aid stores to satisfy the FTC's antitrust concerns, and the deal was revised a few months ago to as many as 1,200 locations. Last week it affirmed its commitment to completing the deal. A New York Post article also reported that a couple of prominent investors have been in talks to help the smallish Fred's finance the game-changing asset purchase.

Neither quarterly report was impressive, but for Rite Aid shareholder purposes it was exactly what they wanted to hear. All three parties are committed to getting the deal done within the next four months.

A Rite Aid ad showing fresh produce.

Image source: Rite Aid.  

Refilling a prescription isn't always easy

Rite Aid stock has been a volatile beast since Walgreens agreed to buy the smaller rival in a deal that was originally valued at $17.2 billion in late 2015. The FTC's slow-footed ways and antitrust concerns nixed a quick close to the deal, but now we're in 2017 and Walgreens, Rite Aid, and Fred's will have to become master contortionists to squeeze this transaction through. 

The original deadline came and went in late January. Walgreens -- the entity with the renegotiation leverage here in this hot mess of a transaction -- struck a revised deal that would be kinder to its pocketbook. Instead of shelling out $9 a share to Rite Aid shareholders, the new price would be as low as $6.50 if 1,200 stores have to be unloaded. The tweaked deal has a July 31 deadline.

There are still some lingering concerns that surrendering 1,200 stores won't be enough to appease regulators. Walgreens also dodged an analyst question asking if the deal could still happen if Fred's isn't able to hold up its end of the bargain. However, as long as Walgreens is working with the FTC, as it indicated last week, there has to be some degree of optimism on getting a deal done.

Things can get scary for Rite Aid investors if things don't pan out. Deutsche Bank analyst George Hill cautioned last month that the stock could fall as low as $2.25 if the deal falls apart. That seems extreme. Rite Aid stock was trading for just above $6 the day before the original 2015 deal was announced. However, with Walgreens continuing to be the one calling the shots here, one can only wonder what the next offer out of Walgreens would be -- if there is one at all -- should this deal not close by August. 

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Stocks Mentioned

Rite Aid Corporation Stock Quote
Rite Aid Corporation
RAD
$8.69 (7.95%) $0.64
Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
WBA
$41.65 (1.86%) $0.76
Fred's, Inc. Stock Quote
Fred's, Inc.
FRED

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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