Shares of retail pharmacy chain operator Rite Aid Corporation (NYSE:RAD) took another hit last month after regulators hinted at increased scrutiny of its long-awaited sale to Walgreens Boots Alliance Inc (NASDAQ:WBA). According to data from S&P Global Market Intelligence, the market lopped off 19.6% off the company's share price during the month of May.
It's been over a year and a half since the two pharmacy chain operators announced their intention to join forces. Even though Rite Aid has agreed to shed hundreds of stores to appease the Federal Trade Commission (FTC), it looks like the regulatory agency has begun prepping to block the merger. Last month the New York Post unearthed mandatory requests sent to Walgreens' vendors and competitors that could be used to challenge the deal in court.
The FTC wasn't the only entity upsetting Rite Aid shareholders last month. According to a report by CNBC, Amazon.com hired an industry veteran to introduce an internal pharmacy benefits management platform for its employees. The internet juggernaut hasn't announced official plans to gain a share of the retail pharmacy space, but the prospect is terrifying. Rite Aid's 1.6% operating margin over the past year would almost certainly turn negative if it had to wage a pricing war with the Grim Reaper of retail.
The pair has already agreed to a revised deal that lowered the floor price Walgreens would pay for Rite Aid shares from $9 per share to $6.50 per share. The FTC has until July 7 to compile answers from its recent requests into a lawsuit challenging the merger. If the regulator decides to step aside, investors buying the stock at the recent price of about $3.70 would enjoy a swift 75% return.
When it comes to M&A arbitrage, however, a few percentage points below the proposed offer price is the norm for deals considered likely to complete as planned. In other words, the chasm between Rite Aid's recent stock price and the proposed offer price strongly suggests the deal is toast.