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Brian Nichols covers technology, telecom, and other portfolio strategy-related things. Like Brian Nichols on Facebook @ Brian Nichols is the author of the critically acclaimed book "Taking Charge With Value Investing (McGraw-Hill, 2013)... More
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  • Rite Aid Investors Shouldn't Write Off A Walgreen Acquisition Just Yet

    Over the last month I have written a series of articles addressing the Rite Aid (NYSE:RAD) acquisition talks. My conclusion is that both Walgreen (NASDAQ:WBA) and CVS (NYSE:CVS) are both possible acquirers and would make good suitors, whereas names like Kroger (NYSE:KR) make little sense. However, on Thursday shares of Rite Aid saw some heavy selling pressure behind Walgreen's earnings report. Some of this activity had to do with Walgreen's superior numbers, but then there's the issue of Walgreen management saying nothing about mergers and acquisitions on its conference call, which had Rite Aid investors in an unnecessary frenzy.

    What really seemed to get Rite Aid investors worried that a Walgreen acquisition is no longer possible is when Walgreen announced its store closings. The company specifically said it'll close 200 Walgreen stores in order to meet the $500 million in cost savings that it noted as an effect of the Alliance Boots acquisition. Naturally, if Walgreen is closing 200 stores then the potential of it buying another 4,000 stores with Rite Aid seems unlikely, right?

    Personally, I think CVS is a far more likely suitor for Rite Aid due to the pharmacy benefit manager synergies. However, Walgreen is the company that previously said it will seek U.S. acquisitions, and implied that the U.S. pharmacy space is full of opportunity. This opportunity is what has many thinking that Walgreen will do something big, like acquiring Rite Aid. Therefore, regardless of what Walgreen plans to do in relation to the Boots acquisition should not be weighed too significantly as it applies to Rite Aid.

    Specifically, Wall Street expects $500 million in cost savings stemming from the acquisition of Boots, and closing 200 underperforming stores is one way that Walgreen plans to achieve this feat. Furthermore, investors should not discount the fact that Walgreen plans to open about 200 new stores where it sees greater profit potential. Thus, Walgreen is not in the business of downsizing, as the company has made perfectly clear that it sees value in the U.S. pharmacy space.

    That's one of the many reasons I don't think investors should write off a Rite Aid and Walgreen tie up. As stated in my previous article, if Walgreen were to acquire Rite Aid it won't be overnight. The company would have to do thorough research of Rite Aid's 1,000s of stores, and a near-term acquisition so shortly after digesting Alliance Boots is unlikely.

    All things considered, Credit Suisse published a recent report showing how an acquisition of Rite Aid could lead to annual cost savings between $400 and $650 million. This would be near equivalent to the cost savings that Walgreen gained by acquiring the much more pricey Alliance Boots, as Rite Aid has a current market capitalization of only $8.3 billion, and is near the same size by revenue of Alliance Boots. Not to mention, Rite Aid just released full-year earnings, showcasing a year where pre-tax income jumped over 75% to more than $425 million. It's these big savings, the consistent income, and the unprecedented presence that Walgreen would gain that makes me think a Rite Aid acquisition is still very likely long-term.

    Tags: CVS, KR, WBA, RAD, long-ideas
    Apr 10 10:44 AM | Link | 1 Comment
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