Rite Aid Corporation (RAD) vs Walgreens Boot Alliance Inc (WBA)

Earlier this week, The New York Post reported that Walgreens Boot Alliance Inc (NASDAQ:WBA) is considering providing the Federal Trade Commission with a certified compliance notice that effectively puts the government agency on the clock forcing them to render a merger decision within 30 days between itself and Rite Aid Corporation (NYSE:RAD).

Rite Aid Corporation (RAD) vs Walgreens Boot Alliance Inc (WBA)

The odds of Walgreens completing its purchase of Rite Aid depends on who you listen to.

Some people believe that the FTC has taken more than a year to come to a decision because, like the nixed Staples, Inc. (NASDAQ:SPLS) merger with Office Depot Inc (NASDAQ:ODP), they’re not very keen about rubber stamping this kind of corporate concentration.

Is Rite Aid Stock a Buy?

As a result, M&A arbitragers have been given a rare opportunity to make some serious coin from a yes vote — RAD stock closed Mar. 9 trading at $4.66, well below Walgreens’ Jan. 30 revised offer of $6.50 to $7.00 per share — but they will also lose their shirts should the FTC say no to the deal.

InvestorPlace contributor Ian Bezek recently discussed in detail the pros and cons of owning Rite Aid stock given the uncertainty of a deal. Interestingly, Bezek owns WBA stock but not RAD stock, which suggests he’s not at all confident that the merger will get the greenlight.

Speaking of greenlight, David Einhorn’s hedge fund is a big owner of Rite Aid stock, holding 20 million shares of the drug store chain and looking to win big from a yes vote.

However, investors need to keep in mind two things about Einhorn’s play. First, he can afford to lose $40 to $50 million should the deal not get approved and RAD stock craters; secondly, he also has a big stake in Fred’s, Inc. (NASDAQ:FRED) who are still up for buying 865 Rite Aid stores (not as sure thing) as part of Walgreens’ efforts to comply with the FTC.

According to Evercore ISI analyst Ross Muken, “The one remaining uncertainty is who buys the incremental boxes as it is not clear to us that FRED has the financing capacity to do so.”

If a deal doesn’t get done, FRED stock could actually go up because it isn’t exactly lighting it up at the moment. So, Einhorn could still breakeven on his dual-stock bet despite a no approval from the FTC.

WBA Stock Price Without the Deal

That’s the million-dollar question. Since the company announced the deal on October 27, 2015, WBA stock has lost 4.6% of its value while the S&P 500 has sailed ever higher.

It could be that investors aren’t happy with the marriage or they simply feel the company has wasted valuable time on a deal that won’t get done and see no sense in buying before this whole matter is put to bed.

Whatever the reason, Walgreens, Rite Aid and CVS Health Corp (NYSE:CVS) have all seriously underperformed over the last year relative to the index, so it’s not a case of Walgreens necessarily doing anything wrong in particular — including chasing Rite Aid — that has kept its stock down, but rather a cyclical downturn for drug stores.

Frankly, I could see WBA stock go up whatever the verdict, because a resolution means the focus turns back on its own business and that’s always a good thing in the mind of investors.

Bottom Line: RAD Stock vs. WBA

Unless you really want to own a drug store chain, I’d be reluctant to own either stock. I would avoid RAD stock because the downside is almost as big as the upside, and avoid WBA stock because there are better retail stocks to own despite the general carnage taking place in retail.

But if you can afford to lose a few thousand dollars, the arbitrage play on Rite Aid stock is very appealing indeed.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/rite-aid-corporation-rad-vs-walgreens-boot-alliance-inc-wba/.

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