What Rite Aid Could Actually Fetch in a Buyout

The prior speculation was after the CEO of Walgreens Boots Alliance Inc. (NASDAQ: WBA) said that the group was looking for a U.S. acquisition. A report from Yahoo! noted, “Traders are speculating Rite Aid is a better target compared to smaller mom and pop drugstores. And there still are a few of those.”

There may be a problem here in an acquirer actually pulling the trigger on an outright buyout of Rite Aid. The drugstore chain’s market cap remains rather low at $8 billion. Also, the company likely would love to deliver shareholders a big buyout. Still, there is more than meets the eye here.

Rite Aid is still considered to be leveraged by many standards, with total long-term debt maturities of $5.67 billion. The company also still is considered to be in a turnaround. That debt has come down in recent years to much more manageable levels. Keep in mind that the debt will rise again due to a buyout — Rite Aid recently announced the planned acquisition of Envision Pharmaceutical Services from the private investment firm TPG.

The planned acquisition is valued at $2 billion, 90% of which is cash and the remaining in Rite Aid stock (roughly 27.9 million shares). EnvisionRx is a national, full-service pharmacy benefit management company with projected 2015 calendar year revenues of approximately $5 billion and projected 2015 calendar year EBITDA in a range of $150 million to $160 million. The deal is expected to close by September of 2015 and is expected to be accretive to earnings after its first full year.

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When Rite Aid gave its fiscal 2015 outlook with the most recent earnings report, it said:

• EBITDA is expected to be between $1.275 billion and $1.305 billion.
• Net income is expected to be between $315.0 million and $370.0 million, with income per diluted share between $0.31 and $0.37.
• Sales are expected to be between $26.25 billion and $26.4 billion.
• Same-store sales are expected to range from an increase of 3.75% to an increase of 4.25% over fiscal 2014.
• Capital expenditures are expected to be approximately $525 million.

So, what do analysts think? The consensus analyst price target for Rite Aid is now about $9.50. S&P Capital IQ recently gave it a $10 price target. This consensus target is far higher than the $7.88 level from Tuesday, and better than the $8.25 level after the merger-hope gains on Wednesday.

Options show a mixed picture, indicating that if a deal is announced it may be later rather than sooner. The $8.50 calls expiring this week were trading at only $0.05 on last look. Still, the $9.00 calls expiring in July of 2015 were valued at $0.60.

It is hard to imagine that Rite Aid would be held back or held in a much lower light as it would have been in the past. Still, one has to wonder how much the company could fetch in a buyout. A premium would have to be offered, and this was under $2 just under two years ago. Would a buyer think this is cheap just because it was a $40 stock back in the late 1990s?

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If a buyer was to surface, it seems hard to imagine that a buyer would pay more than $9.50 or $10.00 per share. At $9.50, Rite Aid is valued at almost 22 times expected February 2016 earnings and is valued at roughly 27 times trailing earnings.

Anything is possible in the realm of M&A. Still, one has to wonder if a would-be acquirer missed the boat on picking up Rite Aid when it was down and out rather than after it has staged a serious recovery. If a buyout does come, the market is not factoring in any massive premium purchase price — not yet at any rate.