Rite Aid Corporation (NYSE:RAD) has been in a very long and convoluted process of trying to sell itself to Walgreens Boots Alliance, Inc. (NASDAQ:WBA). The process has been especially painful for investors, as delays in the process have dampened the likelihood of a merger. Earlier this year, RAD stock traded above $8. Now it trades under $4.
But RAD stock has been given new life today amid a report that the deal is nearing Federal Trade Commission approval. A new report, which cites antitrust lawyers and a former DOJ official, states that an FTC green light is now “more likely than not.”
This news has RAD stock up about 25% so far in late Monday trade.
Although I tend not to chase stocks that are on the run up, I am buying into this rally. Why?
Walgreens agreed to pay somewhere beween $6.50 and $7 per share for Rite Aid. Even at the midpoint, that is still about 75% upside from today’s roughly $4 prices. If the deal doesn’t go through, the stock will likely fall back to $3, where it was hovering when investors thought the deal was dead. That’s roughly 25% downside.
I like that alone, but consider that the new report suggests it’s, as said before, “more likely than not” that the deal is approved. That means greater than a 50/50 chance RAD gets taken out at $6.75 per share. But even if we’re conservative and call it a coin flip, there’s a 50% chance of 75% upside, and a 50% chance of 25% downside.
Moreover, the FTC has to make a decision by July 7, which means whatever comes is likely to happen in about two weeks.
Those are odds and speed that I can get behind.
Bottom Line on RAD Stock
Even if the deal doesn’t go through, I think it’s a possibility that Amazon.com, Inc. (NASDAQ:AMZN) picks up the tab. Amazon has expressed an interest in getting into the pharmacy business, and after gobbling up Whole Foods Market, Inc. (NASDAQ:WFM), Amazon has shown that big-time brick-and-mortar M&A is officially on the table.
Why Rite Aid? Because while Amazon did enter the storefront grocery model (and, of course, boosted its distribution layout for its own AmazonFresh delivery service), one thing it didn’t pick up by going the Whole Foods route is the pharmaceutical arm seen in the likes of Kroger Co (NYSE:KR) and other traditional grocers.
RAD stock is clearly depressed, and Rite Aid management clearly is willing to buy. That’s not saying it’s a good chance that Amazon would take out Rite Aid, but it at least would make sense, and at $4.3 billion, it wouldn’t break the bank, either.
Even backing out the Amazon story, RAD stock is a great speculative play at this point. The odds are with the longs, and the potential downside is worth the risk.
Just get ready to pull the trigger either way.
As of this writing, Luke Lango was long RAD and AMZN.