Is Rite Aid Corporation (RAD) Stock Worth the Risk Anymore?

Rite Aid - Is Rite Aid Corporation (RAD) Stock Worth the Risk Anymore?

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A buyout is almost always a good thing for investors. But sometimes, the best-laid plans go to scrap, and shareholders who thought they had a winning lotto ticket suddenly realize they misread one of the numbers. Just look at the case of Rite Aid Corporation (NYSE:RAD), which is going through a nauseating up-and-down amid a merger attempt with Walgreens Boots Alliance Inc (NASDAQ:WBA).

Is Rite Aid Corporation (RAD) Stock Worth the Risk Anymore?

All the way back in October 2015, Rite Aid agreed to sell out to Walgreens, with the latter paying $9 per share of RAD stock. But as time has passed, expectations that a deal will go through have soured; Rite Aid stock, which roared when the merger seemed like a lock, is now off more than 40% through the first quarter of 2017.

The issue, as it usually is, is federal regulators. The combination of Rite Aid and Walgreens would greatly consolidate the industry, pairing the Nos. 2 and 3 drugstore chains by revenues. That very well might mean higher prices for consumers.

Another critical worry is the potential additional leverage they would have with the major pharmacy-benefits managers like CVS Health Corp (NYSE:CVS) and Express Scripts Holding Company (NASDAQ:ESRX). By boosting its scale, WBA would have far more power in negotiating terms.

So with the deal on thin ice, and Walgreens actually demanding an answer from regulators within the next three months … is RAD stock still worth a speculation?

Changing Up the Deal

Unfortunately for Rite Aid longs, the drugstore’s business has been fairly lackluster amid the merger limbo. In the latest quarter, revenues dipped by 1.2% to $8.1 billion, while adjusted EBITDA plunged 27% to $274.1 million on a year-over-year basis.

Says InvestorPlace.com’s James Brumley:

“Although Rite Aid’s gross margins are relatively healthy, the company is alarmingly disappointing when it comes to its net profits. The short explanation is, however, it doesn’t run its operation as efficiently as its peers run theirs, and it’s arguably not getting enough traction with its small-scale pharmacy benefits manager EnvisionRx … a business its peers and rivals enjoy much greater scale in.”

The deterioration likely was a key reason for the change in the terms of the merger (announced in late January). Consider that Rite Aid and WBA agreed to a price tag of only $6.50 to $7 per share, depending on the number of RAD stores that can be divested.

What’s Next for RAD Stock?

There is definitely lots of skepticism that the Rite Aid deal will not get done. Shares currently trade at a discount of between 30% and 34% to the price range Walgreens has on the table.

But the worries might be overblown.

After all, WBA and RAD have worked for a prolonged period on this deal to meet the regulatory requirements. To this end, there appears to be a deal to sell 865 Rite Aid stores to Fred’s, Inc. (NASDAQ:FRED) — though that number could go up to 1,200 to alleviate antitrust issues.

And the pro-Trump Administration is likely to have a positive impact on the Federal Trade Commission’s decision on the merger.

When it comes the M&A game, nothing is guaranteed. Deals can easily fall apart — which could mean a big hit for investors. In fact, a Deutsche Bank analyst recently put out a grim report on the deal noting that, if the merger fails, RAD stock could fall to $2.25.

I believe if the parties walk away, both stocks could suffer selling pressure, especially as Wall Street arbitrageurs unwind their positions. But I don’t see it being nearly that severe. Rite Aid is already trading at low levels, and general investor sentiment is negative as it is. RAD stock trades at just 0.15 times sales, versus 0.77 for WBA and 0.45 for CVS.

I for one think the Rite Aid deal will close, and given the current gap with the proposed buyout pricing, that could represent a compelling opportunity to snag 25%-plus returns over the next few months.

In the meantime, we wait.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including Taxes 2017: Saving A BundleFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


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

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