For investors in the Rite Aid Corporation (NYSE:RAD), things have gone from bad to worse. RAD stock has slumped for almost the entirety of 2017, falling from $8.50 in Janaury to just $2.30 now. Year-to-date, the stock is down 73%. But is that enough of a beating yet, or could Rite Aid plunge even lower?
The latest major decline came after Walgreens Boot Alliance Inc (NASDAQ:WBA) terminated its long-running proposal to acquire Rite Aid outright. Walgreens initially offered $9 per share for RAD stock. It subsequently cut that offer to $6.50, but even that was too high, apparently.
Walgreens has put forward a new version of the offer; now they want to acquire only about half of Rite Aid’s store base. This should appease the FTC regulators, while leaving Fred’s Inc (NASDAQ:FRED) with nothing for its troubles. Investors are cold even on this new deal, however; RAD stock has further slumped from $3 into the low $2s over the past month.
What the New Deal Brings to the Table
Many merger and arbitrage players clearly owned Rite Aid in hopes of receiving the full $6.50 per share from Walgreens. Hence, the sharp drop once the companies published the details of the new proposal.
That said, it’s not all bad news for RAD stock owners.
For one thing, the company gets a sizable break fee, since the original Walgreens proposal didn’t close successfully. As a result, Rite Aid scores $350 million. That amounts to 31 cents of received-break-fee per share of RAD stock.
On top of that, Walgreens is still offering to buy 2,186 Rite Aid stores, and they’re willing to pay $5.2 billion for said assets. As of its last reporting period, Rite Aid had $7.2 billion of debt on its balance sheet, and much of the company’s profitability issue has resulted from its excessive interest payments. With $5.5 billion in cash coming from the break-up fee and store sales, Rite Aid should be able to get its balance sheet back onto firmer ground if it decides to remain an independent company.
Recently, Rite Aid revealed that the remaining half or so of its stores that it would have after the Walgreens deal finishes are surprisingly strong. Rite Aid stated that its remaining stores account for close to $750 million of the company’s $1.1 billion in overall EBITDA. And the remaining locations would average $6.1 million in annual sales, as opposed to $5.7 million for its current 4,500 or so locations.
So, Rite Aid is keeping a meaningfully better sampling out of its overall store base.
The FTC Should Approve This Deal
Now, there are some observers still concerned that the FTC might block even this much smaller version of the deal.
The argument goes that if Rite Aid can no longer serve as competition for Walgreens, it would have the same effect as if the original deal had been consummated. However, post-store sale, Rite Aid would still have more than 2,000 locations, and the cash infusion would repair its balance sheet enough to ensure its ability to compete for years to come.
There still is plenty of talk going around on social media about Rite Aid going bankrupt, but this simply doesn’t make sense. Assuming Rite Aid pays down debt with the $5.5 billion in cash, its remaining Debt/EBITDA ratio would fall to around industry medians — very close to CVS Health Corp (NYSE:CVS).
Sure, it won’t necessarily be all-clear for the company; management has to figure out how to get store traffic trending back up. But bankruptcy is off the table in the near-term, and the FTC should approve this deal if it really cares about fulfilling its stated policy objectives.
What Happens to RAD Stock?
Regardless, sentiment remains negative for Rite Aid shares.