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With Walgreen's (WAG) devastating loss of the Express Scripts network (ESRX), I believe that it is only a matter of time before buyout offers emerge for Rite Aid (RAD). The pharmacy is slowly, but surely, edging its way back into profitability. Greater scale under a stronger brand name would help catalyze this process while adding momentum for the buyer. In this article, I will highlight two of the possible buyers - Walgreen and CVS (CVS) - against the target.

Walgreen trades at a respective 11.2x and 11.4x past and forward earnings with a dividend yield of 2.7%. Consensus estimates for its EPS forecast that it will fall by 0.8% to $2.62 in 2012 and then grow by 9.9% and 9.4% in the following two years. Assuming a multiple of 15x and a conservative 2013 EPS of $2.84, the rough intrinsic value of the stock is $42.60, implying 29.7% upside.

After recently purchasing the specialty pharmacy and mail service businesses of BioScrip for $225M, Walgreen is in full acquisition mode. The transaction has already helped diversify business, but prescription losses from the Express Scripts disaster is just starting to take its toll. With each passing day, the company becomes less competitive against CVS. Walgreen could be the tourniquet that stops Rite Aid from bleeding money.

The merger between Express Scripts and Medco Health (MHS) adds insult to injury for Walgreen. As St. Louis Today rightfully noted:

[W]ith this week's merger of Express Scripts and Medco Health Solutions Inc, Walgreen will have to contend with an even larger giant.

Talk about humbling.

CVS, on the other hand, is in a much better position and, accordingly, is favored by analysts. The company posted solid fourth quarter results with $700M worth of free cash flow generated. Perhaps most importantly, the company gained share in retail pharmacy and is starting to pick up from Walgreen's losses.

Consensus estimates for CVS' EPS forecast that it will grow by 16.8% to $3.27 in 2012 and then by 12.8% and 14.6% in the following two years. Assuming a multiple of 15x and a conservative 2013 EPS of $3.63, the rough intrinsic value of the stock is $54.45, implying 22% upside. With CVS offering a lower dividend yield and more volatility than Walgreen, ultimately, the latter is more likely to generate higher risk-adjusted returns.

In the meanwhile, Rite Aid is in need of that tourniquet. $0.64 worth of losses per share is forecasted to improve by 39.1% in 2012 and then by 33.3% and 42.3% over the following two years. Even still, estimates to EPS have fallen by 3.8% and the path to prosperity does not look like it will make it in time to capitalize off the full recovery inflection point.

Disclaimer: The distributor of this research report is not a licensed investment adviser or broker-dealer. Investors are cautioned to perform their own due diligence. We seek business relationships with all of the firms in our coverage, but research covered in this note is independent.

Source: Get Ready For A Rite Aid Takeover