Shares of Rite Aid Corporation (NYSE:RAD) have been a serious disappointment this year. Walgreens Boots Alliance Inc (NASDAQ:WBA) announced its intention to acquire Rite Aid more than a year and a half ago. Many investors thought RAD stock would either be trading higher or, preferably, no longer exist as a public company.
That hasn’t been the case. With the Federal Trade Commission dragging its feet, it has been the cause of heavy frustration from both sides.
Understandably, a well-run outfit like Walgreens just wants to know what’s going on. Will it acquire Rite Aid — which is seemingly deteriorating by the quarter — or will it move on without it?
RAD: The Deadline
It seems we’ll have that answer in as little as two weeks. Walgreens recently put a deadline on the deal, forcing the FTC to reveal its decision within 60 days. That was more than a month ago.
The FTC will now have to answer by July 7, but there are expectations it will want the decision complete before the July 4 holiday. It has been a long and frustrating road, but at least it looks set to end soon.
The Hangup
There’s no reason it should have taken the FTC this long to decide. It’s not as if we haven’t seen retail players merge before or a category-leader scoops up a less-than-stellar competitor a few rungs lower on the ladder.
There were certainly some concerns about the No. 1 taking out and merging with the No. 3. Mostly, those concerns are antitrust related. That’s why the WBA-RAD duo agreed to divest a number of locations to Fred’s, Inc. (NASDAQ:FRED).
However, there was then the concern that Fred’s couldn’t handle such a large deal, (over 1,000 locations depending on the final terms of the deal). It would also roughly triple the size of Fred’s current base. Earlier this month though, Fred’s said it has increased its financing available in the deal.
Where Does Rite Aid Fit?
Walgreens is in the driver’s seat here, in that it will be fine with or without the deal. If the FTC allows it to go through (which is not the assumption), it picks up a number of new locations and can begin its transformation process. If the FTC blocks the deal, then Walgreens will go about its way and keep plenty of cash in its pockets.
But what about RAD stock? The company is not doing that well. Rite Aid’s operating income and gross profit remain under pressure. Gross profit has grown just 6% over the past four years. That’s total growth — not annual growth — by the way. RAD barely broke even last year and analysts don’t expect anything better this year.
For 2017 and 2018 analysts expect basically 0% earnings and revenue growth, which doesn’t give investors a lot to work with. Throw in the fact that this $3.2 billion market cap company is carrying $7.3 billion in debt and the situation gets even more dire.
Should I Buy RAD Stock?
RAD stock has a 52-week high of $8.77 and is down more than 60 on the year. Given that shares recently traded below $3, some investors may find it tempting to take a stab on this low-price security. The only hope with RAD though, realistically speaking, is for the FTC to approve the deal.
The market has all but priced that out of Rite Aid stock. If investors were confident the deal would happen, shares would likely be trading 100% higher than today’s levels, somewhere in the mid-$6 range.
Could it get there? Theoretically, yes. If the FTC were to approve the deal, investors could expect RAD stock to trade notably higher from current levels. In our previous article, we said investors could buy upside call spreads purely out of speculation.
Should the deal not go through though, investors could easily be looking at a 100% loss on that trade.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he did not hold a position in any of the aforementioned securities.
