Walgreens Boots Alliance Inc (NASDAQ:WBA) first announced its $9-per-share offer to buy Rite Aid Corporation (NYSE:RAD) on Oct. 27, 2015. Since then, RAD stock has fallen 36%.
A lot has happened in the 18 months since the deal’s announcement, including the downward revision of the price offered by WBA to between $6.50 and $7.50 per share depending on the number of stores Walgreens ends up buying.
RAD stock closed trading Oct. 26, 2015, at $6.08. The very next day it climbed to as high as $8.74 before ending the day at $8.67, a 42.6% one-day return. If you bought Rite Aid on Oct. 26 and sold the next day — congrats, you made an excellent call.
The problem is, many didn’t.
A Bird in the Hand …
There are plenty of people who’ve ridden the stock down to below $4 in the belief, rightly or wrongly, that RAD stock is worth more than $7 per share, the high end of the current Walgreens offer.
I couldn’t tell you what the actual intrinsic value is, but I’m fairly confident that any institutional owners of RAD stock before the original offer have long since left the building.
Why?
Because, as we’ve found out in recent years, these things take a long time to wind themselves through the Federal Trade Commission — only to get rejected, as was the case with Office Depot Inc (NASDAQ:ODP) and Staples, Inc. (NASDAQ:SPLS).
Rite Aid Opportunity Cost
There is an opportunity cost of holding on to your RAD stock for 18 months.
For example, let’s say you owned 1,000 shares of Rite Aid before the offer. On October 27, 2015, it was worth $8,670, $2,590 more than the day before. If you sold your shares and rolled them into the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — based on buying SPY at the Oct. 27, 2015, high of $207 — today you’d have $9,857, not $3,800 (based on April 21, 2017, closing price of $3.80).
Yes, I get that my example is hindsight, but I’m trying to make a point. Several, actually.
First, acquisitions can be very distracting for both the buyer and seller. Walgreens and Rite Aid have put their businesses on hold to get this deal done. Rite Aid’s earnings were a loss of 2 cents, compared to a 6-cent gain a year before.
Second, why do you think institutional investors often exit positions once an offer is on the table? The odds of the stock moving higher than the buyout price are slim to none. It’s better to move on to another target that can. Sitting around waiting for a better offer is a fool’s game because they often don’t come — and in the case of Walgreens, the number went down, not up.
Hey, I get why people like InvestorPlace contributor Richard Saintvilus see easy gains at these levels, but he’s talking about new buyers of RAD stock. I’m speaking to long-time shareholders who’ve owned its stock since before Walgreens came knocking.
Having done a quick Altman Z-Score calculation for Rite Aid, there’s no doubt in my mind that it will continue to exist should the deal be rejected by the FTC. However, some analysts value RAD shares at no more than $3 if going forward it’s forced to operate as a standalone company.
Rite Aid Altman Z-Score
| RAD | |
| Working Capital | 1,554,000,000 |
| Total Assets | 11,277,000,000 |
| Retained Earnings | -5,241,000,000 |
| EBITDA | 1,103,000,000 |
| Market Cap | 3,810,000,000 |
| Total Liabilities | 10,696,000,000 |
| Net Sales | 32,574,000,000 |
| 2.94 |
Source: Morningstar.com TTM
The Bottom Line for RAD Stock
If you are a long-suffering shareholder, I’m not sure there’s much more downside to your position.
Reading comments from a Seeking Alpha article on Rite Aid, it’s easy to see opinions are divided. Some of you believe the deal is going to get done; some think RAD stock is better off going it alone while others feel management needs to go.
Personally, given what’s happened in the dollar-store space, I have a hard time believing the FTC want the same thing to happen with Fred’s, Inc. (NASDAQ:FRED). The odds are better than 50/50 it will get rejected.
As for going it alone, it probably will have to. Whether the company’s management is doing enough to keep their jobs is certainly debatable, but indications are they’ve done enough to maintain its business at levels comparable to those before the merger process began.
Getting new management means getting new owners — private equity owners — and that’s probably the worst thing that could happen for both shareholders and employees.
If you’re a long-time shareholder, I hope this works out for you. I truly do. But next time you face a fight-or-flight situation, be sure to flee as fast as you can because time is money.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
