Falling Rite Aid Corporation (RAD) Stock Price Tells You All You Need to Know

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After a year and a half of wrangling — mostly with the FTC — market commentator Jim Cramer recently summed up the consensus surrounding the intended acquisition of Rite Aid Corporation (NYSE:RAD) and Walgreens Boots Alliance Inc (NASDAQ:WBA). That is, he wants “the deal to either come to fruition, or fall apart… soon. Why? Because I think that if it falls apart, they’ll do a giant buyback. … Walgreens is a winner, but it has not done us well.”

Falling Rite Aid Corporation (RAD) Stock Price Tells You All You Need to Know

He’s exactly right. Walgreens has largely put other strategic initiatives on hold, waiting on a deal that has taken the FTC way too long to rule on.

It has been equally tough on owners of RAD stock, however, for the same reason. See, any major changes could torpedo Walgreens’ interest in getting the deal done. RAD shares have fallen more than 40% since the offer was first made in October of 2015, with the company effectively handcuffed until it had new ownership, or until the suitor bowed out.

Even Fred’s, Inc. (NASDAQ:FRED), which could buy as many as 1,200 stores Walgreens would divest to appease the Federal Trade Commission, can no longer afford to hold its breath.

Well, the good news is, the matter will be over soon. At the end of March, Walgreens Boots Alliance imposed its legal rights to force a decision from the FTC within three months. The bad news for RAD stock holders is, that decision very well could be “no.”

While some have suggested the sizeable pullback in the stock since late-2015 makes it a bargain whether or not the merger is allowed to proceed, the more likely reality is, after 18 months of uncertainty, Rite Aid is mortally wounded.

Rite Aid Uncertainty Means Headaches for Everyone

To call the matter a debacle is an insult to debacles. The issue has turned disastrous for Rite Aid, exhausting for Fred’s, annoying for Walgreens, and embarrassing for the Federal Trade Commission, which had unnecessarily (though understandably) been dragging its feet.

Most of all though, the delay has been painful for owners of RAD stock.

Aside from the increasing uncertainty of the pairing pushing the price of Rite Aid stock lower, the delay has lowered the price of the deal from the original $9 per share to a figure of between $6.50 and $7 per share of RAD stock, depending on how many stores the FTC says it will have to sell to avoid antitrust issues.

Fred’s could offset at least some of the difference with an offer for the to-be-divested stores, but it wouldn’t have to be as generous as Walgreens Boots Alliance has been thus far. At that point, it becomes a “buyers’ market,” meaning Rite Aid (or Walgreens) will have to sweeten the deal for Fred’s … not the other way around.

It’s not the position RAD shareholders were expecting to be in a year ago.

Walgreens’ management is still optimistic, of course. CEO Stefano Pessina recently made a point of saying “I’m still positive on this deal. … I believe we have a strong argument to defend this deal.” He even went on to comment that he feels Fred’s is ready, willing and able to take the keys for the units Walgreens Boots Alliance can’t keep.

Then again, what else could he say?

Investors Doubt It’s Going to Happen

The market wholeheartedly disagrees with Pessina’s optimism, by the way. The proof? RAD stock is presently valued at less than $5, or more than a dollar and a half less than the most recent offer price from Walgreens. If nothing else, expectations that a deal/approval was imminent would put the stock’s current price at or just below the low end of the potential per-share payment.

They have good reason to be suspicious.

The proposed deal in and of itself is a reasonable one, provided Fred’s gains access to another 1,000 or so storefronts. It may even enhance competition.

The problem for the FTC is, it has approved similar split-ups in the past that were designed to enhance competition, and one side of the split ended up going under, ultimately decreasing competition. Specifically, the 300-plus Family Dollar Stores that Sycamore Partners acquired in late 2015 as a condition of the Dollar Tree, Inc. (NASDAQ:DLTR) acquisition of the Family Dollar company are failing as a stand-alone business. Ditto for the 146 Albertson’s grocery stores Haggen LLC bought from Safeway in 2015 as a condition of Safeway’s acquisition of the chain. Haggen has filed for bankruptcy, potentially removing competition rather than enhancing it.

The FTC can’t afford to set the stage for another miscue like those.

Bottom Line for RAD Stock

Never say never. Indeed, the Federal Trade Commission could end up settling the matter with a coin toss. Who knows?

As it stands right now though, the odds and the market are both saying this deal isn’t going to happen. It’s unfortunate too, as the lack of a deal could ultimately end up sending a struggling Rite Aid to its doom. If the FTC is concerned about a lack of competition if the proposed deal get the green light, the commission may also want to think about how little competition there will be if one of the two parties involved implodes.

One only has to look at the FTC’s rejection of the merger of Office Depot Inc (NASDAQ:ODP) and Staples, Inc. (NASDAQ:SPLS) last year. Together the two office supply retailers had a shot at competing with Amazon.com, Inc. (NASDAQ:AMZN). Separately though, each continues to flounder. Staples is mulling a sale to a private equity firm as a last-ditch hope, while Office Depot isn’t faring much better.

If either or both wither away, Amazon will take even firmer control of that office supply market. One can’t help but wonder why the Federal Trade Commission doesn’t look at matters from a “what if we don’t?” perspective.

A buyout really is the last best hope for RAD stock, but it’s not looking likely.

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


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/falling-rite-aid-corporation-rad-stock/.

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