The proposed acquisition of Rite Aid Corporation (NYSE:RAD) by Walgreens Boots Alliance Inc (NASDAQ:WBA) has been plagued by stumbling blocks and delays since it was first unveiled in October 2015, and rumors that the Federal Trade Commission was going to block the deal have been in circulation for months. So what happened to RAD stock on Friday, in retrospect, shouldn’t have been that surprising.
There’s a high degree of certainty surrounding the latest chapter in the saga, however, that was spooky enough to Rite Aid shareholders to send the stock down by more than 14% on Friday.
That news? The Capital Forum’s report that the Federal Trade Commission is indeed preparing to argue against the pairing of the two companies in a courtroom.
The Beginning of the End
The Rite-Aid Walgreens saga has become an exhausting tale that fortunately, for better or worse, will soon be over. The crux of the delay was an FTC review panel that was unwilling to make a truly nonpartisan decision until fully staffed, although the active members have expressed concerns that the pairing could set the stage for a monopoly in some markets.
Walgreens Boots Alliance — operator of Walgreens in the United States — offered to sell as many as 1,200 stores to competitor Fred’s, Inc. (NASDAQ:FRED) after the merger was consummated, but the Federal Trade Commission still balked.
In early May, Walgreens delivered a “certified compliance” letter to the FTC, explaining it had supplied all the necessary information it was able to, and needed the regulator to make a decision. The FTC appears to have just made a decision, albeit one owners of RAD stock didn’t like.
Rite Aid has been on the ropes for a while now. While capable of reliably growing the top line, operating income has been slipping since 2014. Analysts expect the situation to worsen going forward, hence the hope surrounding the team-up between Rite Aid and Walgreens.
If RAD can’t get the help it needs, it has no other legitimate options for long-term survival. Rite Aid’s debt load has grown to $7.6 billion (versus a market cap $3.3 billion), and it’s only generated about $4 million worth of net income over the course of the past four quarters.
Looking Ahead for RAD Stock
Investors should bear in mind that as it stands right now, the FTC has neither confirmed nor denied the report from Capital Forum, and Capital Forum has not offered firm details as to its specific source.
Still, in that the news jibes with the consensus that’s been circulating for weeks now, it’s not difficult to believe the rumor.
And as for RAD stock? With today’s move, it’s now down 64% from its January peak … when investors began digesting the possibility the deal wasn’t going to be approved. Rite Aid’s demise since then reflects the gradually-growing acceptance of this worst-case scenario.
Nevertheless, confirmation from the FTC could do further damage to RAD shares.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.