2 Huge Thumbs-Up for Walgreens Boots Alliance, With Rite Aid Hanging in the Balance

Merrill Lynch’s investment rationale from a reiterated Buy rating on August 29 said:

In conjunction with our view of the slowdown in generic inflation and a movement towards generic deflation, we believe drug chains and dispensers of drugs are poised to benefit from this deflationary trend. We see the planned RAD deal as being a good move by WBA and see significant benefits that the combined organization will have in reducing the overall cost structure of the businesses.

As for the Merrill Lynch valuation:

Our 17 times P/E multiple is a 10% premium to the current trading range of comparable companies. We assign a higher Price/Earnings (P/E) multiple due to greater cost cutting efficiencies that can be achieved within the Retail US segment and greater expansion of private label offerings. Risks to our price objective are continued reimbursement rate pressures, FTC blockage of the planned Rite Aid deal, and softness within the front end retail business.

Prime Therapeutics is owned by a consortium 14 private Blue Cross Blue Shield plans. The recently announced alliance will be a new model that aligns pharmacy, PBM and health plans in an effort to coordinate patient care, improve health care outcomes and deliver cost of care opportunities. Walgreens has over 8,000 retail locations and Prime Therapeutics has some 22 million members.

Shares of Walgreens were trading up 0.6% at $81.23 on Thursday, with a consensus analyst price target of $91.98 and in a 52-week range of $71.50 to $95.74.

Rite Aid shares are closer to $7.55 and continue to trade well below its $9.00 per share cash buyout offer. That deal has been approved by shareholders, but the regulatory review remains an unresolved issue. Investors should understand that a merger arbitrage spread indicating almost 20% gains if the deal were to close should be viewed as a red flag, with many investors not expecting the deal to close successfully. That being said, Rite Aid shares remain in limbo until more clarity is seen on this issue.

Rite Aid’s shares have a consensus analyst price target of $8.88, and the 52-week range is $5.88 to $8.74. Other key research on the Rite Aid deal and the valuation from recent months were as follows:

At the time of the merger, 24/7 Wall St. opined that Rite Aid could have demanded a higher buyout price. Still, that was then and a lot has happened since. Stay tuned.