Why Walgreens Boots Alliance Fell 6.3% in May

Shares sank after news broke that federal regulators are gathering more information related to the company's pending acquisition of Rite Aid.

Brian Feroldi
Brian Feroldi
Jun 7, 2017 at 1:10PM
Health Care

What happened

Shares of Walgreens Boots Alliance (NASDAQ:WBA) fell more than 6% in May, according to data from S&P Global Market Intelligence. The drop was caused by a news article that suggested regulators might block its pending takeover of Rite Aid (NYSE:RAD)

So what

An article published in the New York Post stated that the Federal Trade Commission has sent out mandatory information requests to Walgreen's suppliers and competitors. The article's source hinted that this information-gathering effort could be used to defend the government from a lawsuit should they choose to block the merger. It also shows that the agency is not yet ready to give the transaction the thumbs up, which is troublesome since 19 months have already passed since the deal was first announced.

businessmen looking over a contract

Image source: Getty Images.

Shares of Rite Aid and Walgreens both took a hit when this news report surfaced on May 16, though Rite Aid's drop was far more dramatic than that of Walgreens.

WBA Chart

WBA data by YCharts.

To add insult to injury, another news report from CNBC in May stated that Amazon is taking a hard look at the retail pharmacy industry. The report noted that the internet retail juggernaut recently started developing an internal pharmacy benefits management platform to be used by its employees, which hints that it is looking to make a broad push into the industry. 

Given these developments, it's easy to understand why traders knocked down Walgreen's share price in May. 

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Now what

It has been a grueling 19 months for shareholders of both Walgreens and Rite Aid. Investors in both companies have already faced a number of roadblocks related to this deal, so this latest news reports only adds to the uncertainty. Thus far, both companies have shown a willingness to push through the problems as they arise, and Rite Aid even agreed to a much lower purchase price to ensure the transaction goes through. That's telling about how badly both companies want this transaction to go through.

Does this drama story have a happy ending in sight? That's tough to say. We do know that Walgreens and Rite Aid announced that they have "certified substantial compliance" with the FTC's information request. That move forces the agency to reach a decision by July 7, so the end could be near. 

However, Rite Aid's stock is currently trading at a deep discount to its takeover price, so it is clear that the market does not have any faith that this deal will get the green light. Given the recent news from the New York Post,  I'm inclined to agree with that view.