On June 29, Walgreens Boots Alliance Inc (NASDAQ:WBA) and Rite Aid Corporation (NYSE:RAD) announced they were calling off the previous merger agreement where Walgreens would buy Rite Aid outright. Because it couldn’t secure regulatory approval, Walgreens is instead buying 2,186 Rite Aids stores — mostly in the Northeast, Mid-Atlantic and Southeastern regions.
Rite Aid’s total store count at the end of the first quarter was 4,523, so the deal will leave just over half of the pre-deal stores. That’s quite a drop. All of the locations in California, Oregon, Michigan and Washington state will remain. Many will remain in Ohio. Its store presence in the other states will drop rather dramatically.
Before the deal, Walgreens boasted 13,200 stores in 11 countries. The deal is certainly not transformative for Walgreens, but the new locations account for nearly 17% of its total existing store count.
So, it is still a significant deal and adds to an already significant debt load of nearly $19 billion — Walgreens is paying Rite Aid cash for the stores.
The Bright Side for RAD Stock
The deal actually helps Rite Aid out immensely. Of course it cuts the stores in half, but Rite Aid had nearly $7.3 billion in debt. Rite Aid will receive $5.2 billion in cash for selling its stores and said the bulk of the proceeds (it expects net proceeds of $4.9 billion) will go to paying down debt. And Rite Aid is also getting $325 million from Walgreens since the deal fell through. Not a bad consolation prize.
The overall deal is actually great for Rite Aid investors. Lower debt will help it cut interest expense that was running in excess of $400 million annually. Reported profits had been dwindling, falling from $2.1 billion in fiscal 2015 to less than $4 million last year. Overall, interest expense will take a much smaller bite from the income statement.
Rite Aid’s cash flow trends were more consistently higher, but also erratic. Operating cash flow hit nearly $1 billion in 2016, but also fell to only $225 million in 2017. And capital spending was averaging around $500 million over the past five years. Less interest expense is also less cash flow going out the door each year.