Walgreens Boots Alliance Inc (NASDAQ:WBA) made lemonade out of its Rite Aid Corporation (NYSE:RAD) lemons, cancelling its merger with the troubled pharmacy chain and gobbling up its stores instead. WBA stock was up 5% in Thursday’s premarket trade as a result, overshadowing what looked like a poor earnings report.
Walgreens earnings for its third fiscal quarter came in at $1.162 billion ($1.07 per share) on revenues of $30.118 billion, against earnings of $1.103 billion ($1.01) and revenue of $29.498 a year ago. The earnings were well short of the analyst estimate, $1.31 per share, but the top line beat expectations of $29.7 billion.
WBA stock holders barely noticed
Rite Aid Loses
The deal will see Walgreens buy just about half of Rite Aid’s stores and three warehouses, for $5.175 billion in cash. WBA also will terminate the previously agreed merger for a $325 million fee, which sent Rite Aid shares plunging 17% in premarket trading, to $3.21 per share.
It also made fools of speculators who had bet the deal would go through after Fred’s Inc. (NASDAQ:FRED), which had agreed to take 1,200 Rite Aid stores in an amended deal meant to satisfy regulators in January, adopted a poison pill to prevent its own takeover. FRED stock was down 22% in pre-market trading on June 29.
The final deal gives Walgreens the growth it wanted, and at a knock-down price from the $17.2 billion it originally intended to spend in October 2015.
Rite Aid is left to fend for itself. Fred’s is left at the altar.
The new deal is expected to close in six months, after which Walgreens will take over the store on a phased-in basis, converting the stores it wants to the Walgreens brand. This is expected to yield savings of $400 million.
CEO Stefano Pessina said the new deal “extends our growth strategy and offers additional operational benefits,” allowing expansion “in key markets, including the Northeast,” where Rite Aid was strongest.
More Good News
The new Rite Aid deal overshadowed more good news for WBA stock holders — an agreement with Laboratory Corp. of America Holdings (NYSE:LH), commonly known as LabCorp, to offer laboratory tests from within some Walgreens stores. This replaces a deal it had with Theranos, a startup and onetime unicorn that was unable to deliver on its promises of quick, single-drop of blood testing.
LabCorp already has 1,750 patient service centers and will benefit from tapping into customers through the Walgreens Healthcare Clinics, which compete directly with CVS Health Corp’s (NYSE:CVS) Minute Clinics. CVS was not impacted by all the Walgreens news, and was up slightly in premarket trading.
Whether TrumpCare passes or not, I think in-store clinics make a lot of sense for both patients and all the chains running them. Their combination of low-costs, computer technology, and drop-in convenience should prove attractive to insurers and managed care groups looking to save money.
With the merger talk out of the way, Walgreens is now in a better position to call on such groups and make more deals.
Did You Buy WBA Stock?
I wrote June 23 that CVS would be a big winner if TrumpCare passes, because people who lose insurance coverage will find the clinics’ nurses and para-professionals a low-cost alternative to doctors in routine cases.
Walgreens should get some of those same benefits, as may Wal-Mart Stores Inc (NYSE:WMT), which has been putting clinics into some of its stores.
Laura Hoy, who called Walgreens “easy money” on June 28, now looks like a savant. She wrote that Walgreens was undervalued even without the merger, and that it looked like “a pretty good buy,” as the turmoil over the merger was keeping the stock price down.
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 no shares in companies mentioned in this story.