Rite Aid Corp. (NYSE: RAD) remains caught in what many investors equate to a merger time warp. That often just might not mean that the low volatility in a post-merger announcement leaves any great value or upside in the turnaround pharmacy chain. In the case of Rite Aid, it could be the opposite.
Credit Suisse started new analyst coverage on many health care related stocks on Wednesday, issuing very positive views on Rite Aid and on would-be acquirer Walgreens Boots Alliance Inc. (NASDAQ: WBA).
Robert Willoughby, Credit Suisse’s analyst behind the call, issued an Outperform rating with a $9.00 price target on Rite Aid. The firm’s prior rating had been Neutral. The long and short of the matter is that this implies some 13% upside, but that may have a kicker to it if the merger story changes.
Walgreens Boots announced in late 2015 that it would acquire Rite Aid for $9.00 per share. The annualized upside if the deal closes is closer to 26% if the August 31 time and date is allowed to close. Some investors worry that regulatory powers might pose a hurdle. On this front, Willoughby said:
The deal is trading at a roughly 75% implied probability of success assuming a downside risk of $4.65 per share. The Credit Suisse Special Situations Desk believes odds of the deal’s success are approximately 85%.
The boards of both companies support the combination, but the deal is facing FTC scrutiny, with a request for additional information issued on December 11, 2015, as expected. Walgreens Boots Alliance, which has its own unique growth challenges, has indicated a willingness to divest up to 1,000 of Rite Aids approximately 4,600 stores to appease the FTC. We expect it will attempt to renegotiate, not abandon, the merger agreement in the event deeper cuts are requested.
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