Why Rite Aid and Walgreens Scuttled Their Merger

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Rite Aid Corp. (NYSE: RAD) saw its shares take a dive on Thursday morning after the firm reported its most recent quarterly results and after it said that its merger agreement with Walgreens Boots Alliance Inc. (NASDAQ: WBA) was being scuttled. Walgreens also announced its most recent quarterly results Thursday morning.

In connection with the termination, Walgreens has agreed to pay Rite Aid a termination fee in the amount of $325 million in cash.

Despite the companies not reaching an agreement for an all-out merger, they did agree on a substantial asset purchase by Walgreens. The firm will acquire 2,186 stores, related distribution assets and inventory from Rite Aid for an all-cash purchase price of $5.175 billion, on a cash-free, debt-free basis. Under the terms of the agreement, Rite Aid has the option to purchase generic drugs that are sourced through an affiliate of Walgreens at cost substantially equivalent to Walgreens for a period of 10 years.

John Standley, Rite Aid board chair and chief executive, commented about the merger falling through:

While we believe that pursuing the merger with WBA was the right thing to do for our investors and customers, this new agreement provides a clear path forward and positions Rite Aid as a strong, independent, multi-regional drugstore chain and pharmacy benefits manager with a compelling footprint in key markets. The transaction offers clear solutions to assist us in addressing our pharmacy margin challenges and allows us to significantly reduce debt, resulting in a strong balance sheet and improved financial flexibility moving forward.

Rite Aid reported that it had a net loss of $0.05 per share and $7.8 billion in revenue in its fiscal first-quarter. Thomson Reuters consensus estimates had called for a net loss of $0.01 per share and $8.17 billion in revenue. The same period of last year reportedly had $0.01 in earnings per share (EPS) and revenue of $8.18 billion.

Walgreens posted $1.33 in EPS and $30.1 billion in revenue for its fiscal third quarter. Consensus estimates were $1.30 in EPS and revenue of $29.75 billion. In the same period of last year the retailer posted EPS of $1.18 and $29.5 billion in revenue.

Shares of Rite Aid closed Wednesday up 5% at $3.93, with a consensus analyst price target of $6.19 and a 52-week range of $2.90 to $8.77. Following the release, the stock was down about 21% at $3.08 in early trading indications Thursday.

Walgreens shares closed Wednesday at $77.09, with a 52-week range of $75.18 to $89.69. Following the release, the stock was up 5% at $81.02 in early trading indications Thursday.