Big news hit the Street this week as Walgreens (WBA) announced it would be acquiring Rite Aid (RAD) for about $9 per share, coalescing two of the three largest pharmacy and drug store companies into one massive entity.
RAD shares skyrocketed over 40% on the news, adding yet another headline to the long list of health-care mergers and acquisitions we’ve seen this year already.
RAD is so cheap that it’s a spectacular deal for WBA, which gets the business at a substantial discount. When I crunched the numbers previously, it looked like the gap between the two stocks had gotten so wide that WBA could pay the equivalent of $6 in its own stock for every $1 in RAD earnings and the deal would still be instantly accretive as an investment in discounted cash flow.
In fact, WBA would have needed to pay about $24 per RAD share in order to not get a good deal here, just lining up what it costs the company to grow internally versus what bolting on RAD gives it right away. They paid 37% of that price — so this is a fantastic buy for them.
The Pharmacy Landscape
At 58% market share, CVS (CVS) still has a slight edge in the space, but at this point, duopoly scale is locked in: WBA stock, with the addition of RAD, might keep around 41% of the U.S. market if antitrust regulators approve, leaving the scraps for regional chains and surviving independent stores to fight over.
After this, it’s a matter of both competitors jockeying for incremental business, shifting their operational footprint into places like pharmacy benefits management and online services, and otherwise enjoying their dominant position. This retail channel creates about $21 billion a month in sales and now two companies split that big flow of cash.
Pharmacy retail is in a great place right now. Over the last year, the channel has grown about 50% faster than overall retail — only 3% but still ahead of grocery, apparel and department stores.
Since early 2010, the channel has turned into an essential piece of the U.S. consumer landscape, growing overall sales about 25% in five years. Only auto retail, gas stations and restaurants have done roughly as well or better. With the exception of auto, these are places you go to buy products and services you can’t get online in any convenient way.
All other traditional retail categories have suffered as online competitors emerge.
Bottom Line for WBA Stock
This is fantastic news for both WBA and RAD stock and for subscribers to my Absolute Capital Return service who have RAD in their portfolios.
RAD is down today after yesterday’s huge surge, hinting that traders think they can work their cash even harder over the next year, which is how long it’s expected to close the deal.
But overall, I think positive movement for RAD in the coming days and weeks is a sure thing.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
