The ongoing merger climate has been very prone to deals being blocked by regulators if there are any serious competitive concerns. One deal that has been a long shot has been the pending Rite Aid Corp. (NYSE: RAD) acquisition by the Walgreens Boots Alliance, Inc. (NASDAQ: WBA). If you just trust what Walgreens said after earnings, the deal may be closer to completion than almost any investor would have imagined last week.
Recall that Walgreens has offered $9.00 per share in cash to acquire Rite Aid. This deal has been on the books for close to a year now, but the merger arbitrage spread up to Thursday had indicated that regulators at the U.S. Department of Justice or the Federal Trade Commission were overly concerned about how much market share this would give Walgreens.
Walgreens originally expected to shed 500 or so stores. That number could be close to doubling, but Walgreens has now indicated that it expects to divest less than 1,000 Rite Aid locations to secure approval for this merger. Its statement has been included below.
This feels like a serious change in how the public may view the Rite Aid acquisition by Walgreens. That being said, there is no free lunch on Wall Street. In some ways this has at least some characteristics of the blocked Staples-OfficeMax-Office Depot deal that was blocked, but in other ways there are still more competitors in the retail pharmacy space.
The firm called Leerink noted that this announcement is a positive indication for the chances of Walgreens to receive regulatory approval. The firm also pointed out that Walgreens is still touting how it will realize $1 billion in post-merger cost synergies, even if it has to divest more stores than anticipated.
Credit Suisse recently added Walgreens to its Focus List, noting upside from the potential merger if allowed.
The company has over 8,100 retail locations under the Walgreens and Duane Reade brands in the United States. Internationally, its Boots and other brands have almost 4,600 locations in the United Kingdom, Europe and elsewhere.
As of early 2016, Rite Aid operated approximately 4,561 stores in 31 states of the United States and in the District of Columbia.
As far as what this would mean on a national basis, InterNations shows that there are about 67,000 retail pharmacies located in the United States. The leading chains have 28,000 of all U.S. pharmacies. Of that, CVS Pharmacy has more than 9,600 locations across the country.
Other top pharmacy chains, most of which are stores within a store, with retail locations are in Wal-Mart, Kroger, Target, Kaiser Permanente, Sears, Dominick’s, Publix, Costco and more.
The official statement from Walgreens said:
Walgreens Boots Alliance and Rite Aid remain actively engaged with the Federal Trade Commission (FTC) regarding its review of the pending acquisition. As a result of the progress of these discussions with the FTC staff, Walgreens Boots Alliance is exploring potential divestiture remedies to address certain issues raised in those discussions.
In order to expedite that process, Walgreens Boots Alliance now expects that the most likely outcome will be that the parties will be required to divest more than the 500 stores previously communicated, but still continues to expect that fewer than 1,000 stores will be required to be divested. In addition, the company continues to believe that the acquisition will close in the second half of calendar 2016.
Taking into account its current expectation of store divestitures, Walgreens Boots Alliance continues to expect that the acquisition will be accretive to its adjusted earnings per share in the first full year after closing of the transaction. The company also continues to expect that it will realize synergies from the acquisition in excess of $1 billion, to be fully realized within three to four years of closing. These synergies have been updated where practicable and, as previously disclosed, are expected to be derived primarily from procurement, cost savings and other operational matters.
Rite Aid shares were last seen trading up 5.8% at $8.20, still short of the $9.00 buyout price. 24/7 Wall St. originally opined at the onset of this merger (in 2015) that Rite Aid could have sought a higher price.
Walgreens shares were up 2.2% at $84.74, in a 52-week range of $71.50 to $95.74. Its consensus price target is $91.98.
On last look, Rite Aid’s short interest was 24,387,500. Its average daily volume is now down about 16 million shares, but the trading volume after two hours (plus pre-market) on Thursday was over 52 million shares.
Again, this offers serious upside for those who believe the merger will close, particularly if you were holding before this update. The downside is of course that the regulatory environment has been anti-merger of late. There is also the serious notion here that all the implied merger arbitrage upside won’t have looked worth the risk if this merger gets blocked.