Why Fred's, Inc. and Rite Aid Corporation Stock Popped Today

Both drugstore chains have a lot to gain if the Walgreens/Rite Aid merger goes through.

Steve Symington
Steve Symington
Jun 26, 2017 at 6:19PM
Consumer Goods

What happened

Shares of Fred's Inc. (NASDAQ:FRED) rose 23% on Monday following speculation of the impending approval of Walgreens Boots Alliance's (NASDAQ:WBA) impending combination with Rite Aid (NYSE:RAD). Shares of Walgreens and Rite Aid also climbed around 2% and 30%, respectively, today.

So what

Fred's shares skyrocketed late last year after it signed an agreement to acquire 865 stores from Walgreens and Rite Aid, as well as assets related to the stores' operations, for $950 million. Fred's management called the deal a "transformative event" at the time, noting it would turn the company into a "new national competitor" as the third-largest drugstore chain in the U.S.

But that elation faded after it became apparent the Walgreens/Rite Aid merger would be subjected to increased antitrust challenges from the U.S. Federal Trade Commission. Rite Aid shares plunged in January after it agreed to both accept a lower acquisition price of $7 per share (down from $9 initially) and delay the merger to allow more time to satisfy the conditions for regulatory approval. The FTC's scrutiny only appeared to intensify further in recent months as it made additional requests for information.

Fred's store


However, according to a new CTFN report today -- citing both antitrust lawyers and DOJ officials -- it's "more likely than not" that the merger will be approved.

Now what

Fred's shares are down around 30% so far in 2017, but also trade around 10% higher than they stood just prior to striking their own opportunistic deal to help propel the Walgreens/Rite Aid merger forward. Meanwhile, Rite Aid stock sits at just $4 per share as of this writing -- a roughly 42% discount to the agreed-upon acquisition price. So if the merger is indeed approved as CTFN suggests, I won't be surprised to see both Fred's and Rite Aid continue to skyrocket from here.