Rite Aid Corporation (NYSE:RAD) had a good day June 26, as rumors swirled that the proposed merger with Walgreens Boots Alliance Inc (NASDAQ:WBA) would in fact get the green light. However, while RAD stock soared by 30%, remember — for every so-called source that says the deal will happen, others think the Federal Trade Commission will vote against the merger.
The FTC has until July 7 to vote on the matter. If it doesn’t, the deal is automatically approved and the merger goes ahead as planned. One way or another, Rite Aid’s future as an independent, publicly traded company is likely coming to an end.
Maybe not on July 7, but at some point in the future, Rite Aid will cease to exist as a public company.
Here are three possible scenarios for RAD stock should the FTC block the merger.
Scenario 1: Amazon Buys Out Rite Aid
Who knows how far RAD stock will drop if the deal is blocked? If it’s capable of a 30% pop on a rumor, imagine what it will do if its future is seriously imperiled and a $6.50-$7 bid for the company is no longer on the table?
Can you say “penny stock”?
However, some people think Amazon.com, Inc. (NASDAQ:AMZN) will throw its hat into the ring once the deal is squashed and Rite Aid is back in play.
“Even if the deal doesn’t go through, I think it’s a possibility that Amazon picks up the tab,” InvestorPlace’s Luke Lango opined June 26. “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.”
Although most large grocery stores have a pharmacy component to their business model, I don’t believe Jeff Bezos would be willing to fork over several billion for a second-rate drug-store chain.
It would be far cheaper to simply install a pharmacy within each of its Whole Foods locations. Here in Toronto, Canada, where I live, the local Longo’s grocery store chain has has partnered with McKesson Corporation’s (NYSE:MCK) Guardian brand to open pharmacies at each of its locations in the Greater Toronto Area.
I think Amazon can figure this out on its own.
Scenario 2: Private Equity Buyout
Private equity firms are sitting on record amounts of capital, which they’re having troubles investing due to competition from strategic buyers who’ve slowed share repurchases.
“A lot of the investors I talk to are getting capital calls from multiple private equity funds. New funds are being launched every day,” Stephen Weiss, founder and managing partner of Short Hills Capital told CNBC in May. “You’ve got this explosion of assets under management.”
However, the timing on this scenario might be a little off given how many retailers are going broke, many of which are owned by private equity firms.
I’m not sure how eager they’ll be to spend $11 billion or more on a drug-store chain with no real hope of competing against Walgreens and CVS Health Corp (NYSE:CVS).
Scenario 3: LBO
The final scenario sees Rite Aid continue to operate as a publicly traded, independent drug-store chain until management decides to take the company private through a leveraged buyout with or without private equity help.
This last option seems unlikely, or they would have done it already.
Bottom Line on RAD Stock
InvestorPlace.com’s Richard Saintvilus believes that Rite Aid makes a great speculative investment regardless of whether the FTC approves the deal.
While I understand where he’s coming from, I beg to differ.
I do not believe RAD stock is worth nearly as much on its own as it would be in the hands of a much better operator like Walgreens. And without Walgreens, there aren’t many other better operators who are willing to pick up the check.
If this deal doesn’t go ahead by the July 7 deadline, I have little hope of shareholders seeing $7 at any time in the near future.
I hope for their sake that I’m wrong.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.