Spoiler alert. In the Samuel Beckett play Waiting for Godot, Godot never shows up. In the continuing saga of Rite Aid Corp. (NYSE:RAD), Amazon.Com Inc. (NASDAQ:AMZN) is now playing the part of Godot.
Amazon is the off-stage character dominating the on-stage discussion. Its ambition to enter the pharmacy business is well-known. But will it?
Rite Aid, with 2,336 stores following the sale of its other operations to Walgreens Boots Alliance Inc. (NYSE:WBA), which would have acquired the whole company but for the Federal Trade Commission’s objections, would seem to be a natural vehicle for such an entrance.
The remaining Rite Aid stores have average annual sales of $6.1 million and just $3 billion in debt. Combined with a take-out premium, the total cost to Amazon would be considerably less than the $13.7 billion it spent getting into the low-margin grocery business.
So then, why hasn’t there been any action on the stage?
Why the Wait
As with Whole Foods, an Amazon purchase of Rite Aid would give it all the infrastructure needed to get into the pharmacy business, along with physical locations that could be integrated into its network. With Rite Aid, it would acquire all the licenses necessary to not only do retail pharmacy business, but become a pharmacy benefit manager, able to negotiate prices and create standard formularies.
As a standalone business, our Luke Lango writes, Rite Aid remains viable. It is currently valued at just 7.7 times trailing earnings before interest, taxes and depreciation (EBITDA), the metric most used to evaluate potential acquisitions.
But since Lango published this analysis, the stock’s price has fallen from about $2.40 per share to $1.87 per share. The company’s market cap has fallen below $2 billion.
Rite Aid isn’t alone in this. All drug store stocks are falling in the wake of the Amazon rumors. CVS Health Corp. (NYSE:CVS) is down 12% since the Lango story came out. Walgreens is down 17%, a huge hit to its market cap, which now stands at $72 billion.
Like Godot, Amazon looms larger in the imagination than it does on the stage. A startup called NowRX is already taking pharmacy orders in part of California through the Amazon Alexa app.
A recent survey from Wells Fargo & Co. (NYSE:WFC) showed half of all consumers would consider an Amazon pharmacy if it became available. The question then becomes not whether Amazon will enter the business, but whether it needs Rite Aid to do it.
Can Rite Aid Survive?
Absent an Amazon acquisition, what are Rite Aid’s prospects?
Not great. Neither Rite Aid nor its pharmacy benefit manager, EnvisionRX, has the size necessary to get big discounts from drug companies — discounts that are the key to both profits and competitive pricing.
Rite Aid spent $2 billion to acquire Envision in 2015 and the whole company is now worth less than that. Envision has been struggling under Rite Aid’s ownership, with few synergies visible and Envision’s sales declining over the last few quarters.
Still, there remain other boosters of the stock besides Lango. They argue that, with a reduced debt load and a regional rather than national footprint, private equity should be interested in buying the company. Then again, Amazon could merely be waiting for the dust to settle on the WBA deal before pouncing, which would also allow the price to settle and its own costs to go down.
Bottom Line on RAD Stock
While Rite Aid might make a perfect snack for Amazon, there is no need for Amazon to rush to the pantry. It can let fear take the price of Rite Aid down and buy on its own schedule.
Thus, despite the temptation, this version of Godot is not one I’m buying a ticket for.
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 danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
