UPDATE: Rite Aid Corporation (NYSE:RAD) drops in Wednesday afternoon trading after it was reported that the FTC might sue over Walgreens Boots Alliance Inc’s (NASDAQ:WBA) demand they accept or reject the merger deal as amended in January.
Casual lovers of the stock market may be forgiven for wondering if Rite Aid is still on the board.
Sadly, it is. The company’s merger into Walgreens, announced with great fanfare in October 2015, ran into a buzzsaw of Barack Obama Administration objections. This led WBA to change the terms of the deal in January, and not to Rite Aid’s benefit.
Since the changed terms were announced, Rite Aid has lost one-third of its value. The pop RAD stock got when the deal was announced is entirely gone.
Still, we know that the Donald Trump Administration is committed to getting cops out of the suites, and the cops at the Federal Trade Commission, which has been overseeing the deal, are no exception. With the deal’s premium gone, is it time to buy?
Feeling Lucky?
Should the deal go through, even on the current terms, it would provide a fat profit to those who buy Rite Aid now.
The January agreement calls for WBA to pay $6.50 for each Rite Aid share and divest up to 1,200 stores to Freds, Inc. (NASDAQ:FRED), a deep-discount retailer, with a deadline of July 30. If the original terms of divesting 865 stores go through, the price rises to $7. For a stock now priced at $4.52.
InvestorPlace writers are divided in their opinions. James Brumley does not think the deal will go through. Chris Lau thinks it will go through. Richard Saintvilus says there’s no way to know.
Either way, the answer should be known soon. Walgreens has given the FTC until the end of June to say yes or no, through a declaration of “certified compliance.” Basically, take it or leave it.
The big danger for those who choose to buy RAD stock is that, if the FTC holdovers are able to say “leave it,” their investment may become worthless.
Rite Aid Is a Dead Company Walking
Rite Aid is due to report earnings for the quarter ending in February on April 25, and they are not going to look pretty. The consensus is for a loss of 1 cent per share, on revenues of $8.39 billion but the “whisper number” — the guess they’re giving their best clients — is even worse, a loss of 3 cents per share.
Suspense over the deal is not just killing the stock, it’s killing the company. Income statements filed since the deal was announced show the company at break-even, but in fact cash flow has flatlined and its debts, $7.27 billion on assets of $11.66 billion, are not getting paid.
By way of contrast, at the end of October WBA reported just $17.76 billion of debt on its $72.5 billion of assets, and it usually manages to bring almost 4% of its revenue to the net income line.
If acquired by Walgreens, Rite Aid would deliver a nice footprint of new operations. Most of its stores are in the Northeast or California. Walgreens has a much broader geographic distribution, with over 700 stores in Texas, where Rite Aid doesn’t operate at all.
The Bottom Line for RAD Stock
This is a stock for gamblers. If the Trump people can get to the FTC by the end of June and push through the merger, you’re looking at a 46%-65% profit on your investment, by the end of July.
If the FTC holds firm, you’re buying a money-losing chain of drug stores, in a deteriorating retail environment, facing two giant competitors in WBA and CVS Health Corp (NYSE:CVS) that could crush it between them, leaving the rural pieces for Wal-Mart Stores Inc (NYSE:WMT) and Amazon.com, Inc. (NASDAQ:AMZN) to swallow at their leisure.
I suspect the odds are a little better than 50-50 here, but I don’t really go to Wall Street to gamble. Are you feeling lucky?
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
