Walgreens Bid For Rite Aid Stock Might Spark An M&A Battle (RAD,WBA)

Rite Aid (RAD) stock jumped 40% after the Wall Street Journal reported that Walgreens (WBA) is nearing a $10 billion purchase of the company.

Walgreens Bid For Rite Aid Stock Might Spark An M&A Battle (RAD,WBA)Walgreens stock also jumped nearly 6% in response to this news, suggesting that WBA investors like what they hear.

With that said, this is a deal that I predicted back in March, and one that many have speculated about over the last year. In essence, the deal made too much sense not to occur, but as WBA prepares to become substantially larger by acquiring RAD, don’t be surprised if competitors have a plan of their own.

Why Does WBA Want Rite Aid Stock?

If Walgreens is successful in acquiring Rite Aid, next year would reflect the combined performance of four entities. Walgreens completed its acquisition of Alliance Boots earlier this year, which will drive revenue growth of 35.4% this year and 17.2% next year to create more than $121 billion.

Then, it would be adding Rite Aid and its recent acquisition of pharmacy benefit manager EnvisionRX, a $5 billion company. Combined, WBA and RAD would create a healthcare juggernaut with $155 billion in revenue next year.

Furthermore, there’s a reason that Walgreens stock is trading higher behind the WSJ report; RAD will create significant value for shareholders.

For example, Walgreens stock trades at 1.17 times next year’s expected revenue. Meanwhile, Rite Aid stock trades at just 0.25 times FY2016 revenue expectations, after its 40% stock pop. By including RAD’s $33 billion in revenue at a cheap price, Walgreens stock should respond well as cost cuts are made to drive higher margins for the overall company.

Rite Aid Stock in High Demand

Still, Rite Aid stock is very cheap, and for this reason it might be in high demand now that WBA is reportedly close to an acquisition. While WBA and RAD are the numbers two and three largest drugstore chains in the U.S., respectively, the retail pharmacy space in general is very fragmented.

For example, there are grocery and retailers like Kroger (KR) and Wal-Mart (WMT) that have pharmacies in addition to actual drugstores such as CVS (CVS). Then, there are other areas of pharmacy like benefit management (i.e. CVS) that have a retail presence. These are all companies that might have some interest in Rite Aid stock.

However, the one company that might come into play and make a serious run at outbidding WBA is Express Scripts (ESRX). Mizuho Securities first suggested this back in late May.

Express Scripts controls 33% of the pharmacy benefit management space, but after recent acquisitions, CVS has grown its share to 30%. The difference between CVS and Express Scripts is that the former has a retail presence that fuels its benefit management business.

If Express Scripts bought RAD, it would gain more than 13 million benefit management customers along with RAD’s 4,600 retail stores. Thus, it would make Express Scripts more competitive, and drive Rite Aid stock even higher!

What About Rite Aid Stock?

The point is that Walgreens is unlikely to face too much regulatory backlash, but there could be some serious competition to acquire RAD. The possibilities are endless, and now that WBA made its first move, I expect more to follow.

The bottom line is, with Rite Aid stock still more than $2 from the reported purchase price and the strong likelihood that more buyers will arise, now is a good time to own Rite Aid stock.

 As of this writing, Brian Nichols owned shares of Rite Aid stock.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/walgreens-bid-rite-aid-stock-might-spark-ma-battle-radwba/.

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