Shares of drug store chain Rite Aid Corporation (NYSE:RAD) are struggling to stay afloat at the moment as their lifeline, the chain’s acquisition by Walgreens Boots Alliance Inc (NASDAQ:WBA), looks less and less likely to be approved with each passing day. Over the past year, RAD stock has fallen more than 50% as the proposed merger between the two hit several roadblocks as it was scrutinized by regulators.
Now, many believe the purchase is all but off the table as it’s taken two years for the Federal Trade Commission (FTC) to decide if the deal violates antitrust laws. While investor sentiment surrounding the WBA-RAD marriage is decidedly negative, it’s not over quite yet.
Buying Rite Aid stock now is certainly a speculative play, but investors who can stomach the risk will likely be handsomely rewarded should the two drug stores pull off this deal.
Down to the Wire
Both Walgreens and Rite Aid seem ready to move forward, be it with or without each other. Walgreens has given the FTC 30 days notice that it will certify compliance in an effort to push the deal forward to a conclusion. Walgreens believes it has supplied all of the information needed for regulators to evaluate the deal, and certifying compliance will force the agency to clear or reject the deal over the next 90 days.
The certified compliance period expiration coincides with the termination date of the Walgreen-Rite Aid merger agreement on July 31. The deal was announced in October 2015.
What’s the Verdict?
It’s unclear whether the FTC will allow the deal to go through.
To be sure, Walgreens and Rite Aid have made several concessions to appease regulators. The two have agreed to sell off a larger number of Rite Aid stores to rival drug store chain Fred’s, Inc. (NASDAQ:FRED) and reduced the amount WBA will pay for RAD stock to between $6.50 and $7 per share.
However, Bloomberg reported that the FTC was mulling a lawsuit to block the deal.
There really is no way to know for sure what will happen with the FTC, and that’s what makes buying Rite Aid stock such a gamble. That uncertainty is also the reason RAD is hovering near $4 per share … a massive bargain should the deal go through.
Walgreens CEO Stefano Pessina has remained optimistic about the deal despite the delays and the regulatory hurdles the marriage has faced. He also said that WBA would be willing to make further concessions if need be.
If you ask me, Pessina’s attitude and willingness to work with regulators to advance the deal suggests there’s still hope. The market is quick to jump on a bad-news bandwagon, but Pessina’s remarks prove it’s not over yet.
A Bleak Future, But It’s Not as Bad as It Looks
RAD stock has taken a beating over the past few months — down 23% since early February — because of the negative press its deal with WBA has garnered. If the transaction does fall apart the way most people think it will, Rite Aid will certainly struggle to compete against its larger peers.
Not only that, but Rite Aid is also weighed down by a lot of debt.
Still, $4 a share may still be a bargain price for Rite Aid shares even without the merger. Not only has the firm been dragged down by the long FTC approval process, but investors’ focus on the WBA deal has caused undue negativity and left RAD undervalued.
Before the merger was announced back in 2015, Rite Aid stock was trading at around $6 per share. Even if the deal falls through, shares have the potential to make their way back near that area once the dust settles.
Bottom Line on RAD Stock
Buying Rite Aid now is a speculative play. It is certainly not a stable company that you’d want to buy and hold on to forever. The prospect of the Walgreens/Rite Aid merger going through is the real reason to snap up RAD stock, but it’s important to note that placing a bet on a successful acquisition story may not be as risky as it appears.
Rite Aid shares have the potential to make its way higher even if the deal falls through, giving investors something of a safety net.
As of this writing, Laura Hoy was long RAD.