The Market Just Doesn’t Believe in the Rite Aid Merger With Walgreens

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Some companies just seem like they can never give up on a merger. In the case of Walgreens Boots Alliance Inc. (NASDAQ: WBA), the company has been in pursuit of acquiring Rite Aid Corp. (NYSE: RAD) for more than a year now. In fact, this deal has been in the works since October of 2015.

Quite simply, most investors do not believe that this deal will close. The original deal terms have been lowered due to proposed store sales, but the deal originally valued Rite Aid at approximately $17.2 billion on an enterprise basis (debt and stock combined). The original offer was $9.00 per share in cash. At the time, that was a 48% premium to the closing price of Rite Aid.

Then in January of 2017, the companies agreed to lower the acquisition price to $7 per share after Walgreens said it would sell a larger number of Rite Aid stores in an effort to win regulatory approval.

Zoom forward to April of 2017, and Rite Aid shares were barely trading at $4.30. That is far south of the $7.00 reduced price and it is at the bottom of its 52-week range of $4.15 to $8.77.

Reports have been out in recent weeks and months that the Federal Trade Commission may be interested in blocking this potential merger. One wild card, which can of course go either way, is that it is currently unknown how major mergers will be treated by regulators under a Trump administration, compared with the prior eight years of the Obama administration.

When Walgreens released earnings it showed that the pharmacy business picked up in the United States. The company even showed its highest quarterly prescription growth in years. Still, its revenue fell more than Wall Street analysts had anticipated.

Along with earnings came news from CEO Stefano Pessina that he is remaining optimistic about the Rite Aid merger. Pessina acknowledged that the regulatory process has taken longer than expected. The harsh reality is that this pending merger is becoming one of the longest mergers in history. Pessina even said after earnings that the merger is still expected to close by the end of July.

Among some of the antitrust concerns is a belief that a combined Walgreens and Rite Aid could challenge CVS Health and that the company could get an upper hand against the pharmacy-benefit managers that sell into corporate and government drug plans.

The simple view at this time is that any merger-arbitrage trader would agree that either the merger price will not hold up or that the deal would be scrapped. While this is technically an extension of a lifeline for a merger, what does it tell you if a merger price of $7.00 is there versus a current share price that is under $5.00?