Rite Aid & Fred's Surge On Rumors Of Possible Nod For Merger

The stock market saw some interesting movement yesterday, one among them was surging drugstore stocks. The stocks zoomed on speculations that the long-delayed merger between Rite Aid Corporation (NYSE:RAD) and Walgreens Boots Alliance Inc. (NASDAQ:WBA) could finally see the light of day. Yesterday, the rumors of FTC’s possible nod to the deal did the rounds. However, the FTC is scheduled to take a decision on the merger by Jul 7.

Notably, shares of Rite Aid and Fred’s Inc. (NASDAQ:FRED) witnessed substantial uptrend surging as much as 30% and 23%, respectively. Meanwhile, drugstore biggies Walgreens and CVS Health Corporation (NYSE:CVS) jumped 1.6% and 3.5%, respectively.

While the reason for the upside in Rite Aid’s shares is obvious, Fred’s gained due to its agreement with Walgreens to purchase 865 Rite Aid stores, certain intellectual property and certain other tangible assets for $950 million in cash. This would make Fred’s the third largest drugstore chain in the U.S. Notably, the company can forge ahead with the deal only after Rite Aid-Walgreens merger materializes following the FTC clearance.

Earlier this month, Fred’s revealed that it has received increased committed financing for the deal from $1.2 billion to $1.65 billion on Jun 9 and extended the commitment date to July 31. Fred’s could extend the outside commitment date further to Oct 31.

Background

Until yesterday, dark clouds were looming large over the completion of the mega merger as FTC didn’t seem convinced about the deal. FTC’s concerns were mainly regarding the lack of a strong competitor in drugstore space. With Walgreens and Rite Aid being the second and third largest drugstore chains in the U.S., the FTC believed the merger could give rise to a duopoly, as CVS Health is the only strong contender for Walgreens in the drugstore space.

Awaiting the FTC approval, Walgreens and Rite Aid have pushed back its merger date a few times since its initial agreement in Oct 2015. The latest merger deadline is scheduled for Jul 30, 2017.

What have been the Effects of the Merger on Rite Aid?

The agreement with Walgreens aspires to create a behemoth with solid network that will cater to health and wellness solutions both in stores and online and consequently boosted the Rite Aid stock initially. However, the recent delays in the merger deadline and uncertainty regarding the completion of the deal have significantly weighed on the company’s stock price. Notably, the stock has declined a substantial 50% year to date, underperforming the Zacks categorized Retail–Pharmacies and Drug Stores industry’s dip of 6.7%.

Bottom Line

Though the recent market speculation is a silver-lining for the Walgreens-Rite Aid deal, the decision of FTC will decide its actual fate. While some analysts believe the Rite Aid stock may fall apart if the deal fails to materialize, the recent speculations about Amazon.com Inc.’s (NASDAQ:AMZN) plans to explore the pharmacy space and its interest in Rite Aid narrates a different story.

If recent reports are to be believed, Rite Aid seems to be in a safe harbor. This means that the failure of the Walgreens deal will have minimal impact on its share price if Amazon goes ahead with proposing a takeover.

Well, the week ahead will disclose what will be the actual fate of the Walgreens-Rite Aid deal. If the deal is approved, we will probably see further boost in the Rite Aid and Fred’s stocks as they stand to be the primary gainers from the deal.

Both Walgreens and Rite Aid currently carry a Zacks Rank #3 (Hold), while Fred’s carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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