The past decade has brought tumult to the Rite Aid Corporation (NYSE:RAD). The financial crisis nearly destroyed the firm. RAD stock traded down into the pennies, and wouldn’t get back above $2 until 2013. However, an improving economy finally breathed life into RAD stock, which ripped to as high as $9 in 2015.

From then on, things got messy again. RAD stock underperformed the market, as investors speculated that Rite Aid wasn’t strong enough to stand on its own.

Sure enough, taking advantage of perceived weakness, Walgreens Boot Alliance Inc (NASDAQ:WBA) swooped in with a $9/share offer. Long-time RAD stock owners viewed the offer with disdain. It offered no premium at all from where the stock had recently traded.

However, even that $9 offer wouldn’t come to pass. The merger process dragged on throughout 2016, waiting for regulatory clearance. In January this year RAD stock traded above $8.50 in hopes of the deal closing imminently. But Walgreens scuttled those hopes, announcing that they had cut the value of their offer from $9 to just $6.50-$7 per share of RAD stock. Rite Aid has continued to slump then, with the stock falling to new 52-week lows just above $5 this week. Is this falling knife finally a good buy?

RAD Stock Cons

Merger May Be Voted Down: Rite Aid stock owners expressed anger with Walgreens new and markedly worsened offer. Many owners want to vote down the proposed merger. In theory Rite Aid would gain value as a standalone enterprise, rather than taking Walgreens’ low-ball offer.

However, in practice, the opposition to the merger threatens to strip away further shareholder value. Instead of taking a sure thing up at $6.50/share, holders are risking letting the stock continue to trade freely. Given that shares are at $5.20 now, no-merger voters are giving up 25% immediate upside for the opportunity at a greater return. That may work out, but passing up a 25% short-term gain carries much risk.

May Not Survive Independently: Rite Aid is a not a well run franchise. The company has historically struggled to generate profits, a condition that persists to this day. Witness the trailing PE ratio of 64. Despite the falling stock price, the RAD stock remains at more than 8x book value. There is almost nothing of value left for shareholders one you account for obligations. And that’s a problem when you consider that the Rite Aid brand is not a particularly powerful one.

Rite Aid lost money in 2002 and 2003. It then managed to lose money on an EPS basis every single year between 2007 and 2012. A buyout allows a stronger player to close weak stores, improve the supply chain, and correct failing management practices. But absent that, it is hard to see this company surviving, or at minimum not turning back into a penny stock, during the next recession.

Big Downside If Merger Breaks: For a company about to merge, a class of investor known as merger arbitrageurs tend to buy much of the stock. These are people that professionally collect nickels. The life of a merger arb is to buy our hypothetical stock at $9.90 and let the acquirer buy it at $10 from them a couple weeks later. While the profits of any one deal are minuscule, over time, it adds up into solid returns.

However, these investors are fickle. They have no interest in holding any stock where the merger won’t close. If the event a pending deal busts, these merger arb players will dump all their stock immediately and move on, leaving a badly dented stock price behind. For a recent example, look at Office Depot Inc (NASDAQ:ODP) after the FTC blocked the deal with Staples, Inc (NASDAQ:SPLS).

RAD Stock Pros

Greenlight Buying: Greenlight Capital recently bought more RAD stock. The firm took its position up to more than 20 million shares, a sizable boost from the 13 million share position they’d previously held. Greenlight has also increased its stake in Fred’s Inc. (NASDAQ:FRED), showing its ongoing belief in the deal.

Greenlight is no ordinary hedge fund. It’s operated by David Einhorn, the legendary investor who among other things made a bundle shorting Lehman stock during the financial crisis. Between 1996 and the end of 2015, his fund has returned 16.5% annually. Needless to say, he represents a strong vote of confidence for FRED and RAD stock.

Wide Deal Spread: Generally in merger deals, there isn’t much upside. If a company offers $10 cash for a stock, it will usually trade at like $9.80 or $9.90 reflecting the high probability that the deal will close. Normally returns in merging stocks, holding until the deal closes don’t run much above a couple of percent.

RAD stock however, offers a huge premium. With the stock at $5.20, investors would earn a 25% return on their shares assuming the deal closes at $6.50/share. Since the deal is likely to close in just a few months, the annualized return would be significantly higher than even that stated 25%. To put it simply, if you think this deal will close, the market will pay you handsomely.

New FTC Competition Chief: Rite Aid owners face two risks to the Walgreens deal closing. The first of these is that the vote goes against the merger. Assuming that one is taken care, for the moment, that leaves the FTC as a risk.

However, the new FTC Bureau of Competition head, Tad Lipsky, is likely to be pro-merger. In December, following Trump’s victory, Lipsky stated that: “The purpose of antitrust is not necessarily to prevent firms from succeeding, even when they become very dominant in their industry.” His past track record suggests as much. He probably won’t oppose the Rite Aid deal.

Verdict

If you think the deal closes, RAD stock will be a big winner on a risk/reward basis. You don’t get many opportunities to score a 25% return in just a few months in the M&A business.

When RAD was at $6 last week, the risk/reward looked very bad; make 50 cents if right, lose dollars if you’re wrong. Here in the low $5s, reward is much more fairly matched with risk. However, make no mistake, the effort to vote down the merger is foolish and fraught with risk. RAD stock ultimately goes lower if the company remains independent.

At the time of this writing, Ian Bezek owned WBA stock, he had no position in RAD stock. You can reach him on Twitter at @irbezek.