What will likely be the final earnings report of an independent Rite Aid Corporation (NYSE:RAD) is due out before the market’s open on June 29. And despite the crazy movement in RAD stock heading into the event, no one really seems to care about the announcement itself.
For the record, analysts are expecting a loss of 2 cents per share on revenue close to the $8.51 billion of the March quarter. The company’s last substantial profit came in 2015, and $7.263 billion of the $11.593 billion in assets is subject to debt, yet half the six analysts following the company have a buy rating on Rite Aid shares.
The price-to-sales ratio of RAD stock, at the current market cap, is less than half that of CVS Health Corp (NYSE:CVS).
Our Richard Saintvilus is among the bulls, but like others, his case does not rest on results. Instead it rests, in part, on current prices below $4 and the fact that it has a (pending) deal in place with Walgreens Boots Alliance Inc (NASDAQ:WBA) to be sold for $17.2 billion, and $9 per share.
Deal or No Deal?
The huge difference in valuation can be explained by the simple fact that — despite reports to the contrary — many people still expect the Federal Trade Commission (FTC) is expected to deny the deal on antitrust grounds. A decision is due July 7, but a vote could come as soon as June 30.
Walgreens had offered substantial concessions to get this through. It offered to sell 1,200 of the Rite Aid stores to Fred’s, Inc. (NASDAQ:FRED). This would make Fred’s, best known as a discounter using abandoned Wal-Mart Stores Inc (NYSE:WMT) real estate, the nation’s third largest pharmacy chain.
If the deal is denied, our Will Ashworth writes, Rite Aid’s options dwindle, and none seem to involve it continuing as a going concern. It could find another buyer, like Amazon.com, Inc. (NASDAQ:AMZN), it could disappear into private equity or it could go private through a leveraged buyout. It could also, like other retailers, simply disappear.
Rite Aid would be missed. It has about 4,560 stores, many in the northeast, where it bought the Duane Reade chain in 2010 for $1.1 billion.
End Game? No, New Game.
Two years ago, New York magazine called the potential acquisition of Rite Aid by Walgreens “the pharmacy end game,” and if you’re talking about a standard, stand-alone pharmacy store that might be true, with Walgreen’s and CVS as the sole remaining contenders.
But there is a lot more to pharmacies in 2017 than pharmacies. Walmart has pharmacies in most of its stores. So, too does Kroger Co (NYSE:KR). Personally, I still go to an independent pharmacy.
Even without Amazon, there is a substantial mail-order business, which is expected to continue growing significantly.
Many people, especially elderly, get their drugs directly from pharmacy benefit managers (PBMs), Express Scripts Holding Company (NASDAQ:ESRX) being the largest. CVS’ Caremark unit is a factor here, but so is OptumRx, a unit of UnitedHealth Group Inc (NYSE:UNH), which took its pharmacy business in-house by buying Catamaran in 2015.
The largest insurer in the U.S., in other words, is in the process of becoming the largest drug dispenser.
What Happens to RAD Stock Now?
The FTC demanded documents from Humana Inc (NYSE:HUM) on an expedited basis June 21, seeking to get more insight into how a Walgreens-Rite Aid merger would impact competition. Presumably, those documents would determine whether the deal goes through. If the agency makes no ruling before July 7, however, it does indeed go through.
It seems to me that, with the growth of Walmart, the potential entry of Amazon, Kroger, Fred’s, and PBMs like UnitedHealth, there should be plenty of competition with or without this merger.
To me, it’s less a question of will the deal get done, but whether Walgreens can make it pay in this new environment.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.