Rite Aid Investors Still Have An Array Of Opportunities To Profit From This Walgreens Merger Delay

| About: Rite Aid (RAD)
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Summary

As always, tough timing decisions will determine whether you will fatten up your bank account.

There are now three possible future outcomes for Rite Aid; one of them will certainly happen!

Walgreens CEO Mr. Pessina's credibility has taken a hit on Wall Street, with an undeserved effect on Rite Aid stock.

Rite Aid's maximization of shareholder equity can only occur remaining independent, with activists or another acquirer stepping in, the least likely outcome.

Previously, I wrote a Seeking Alpha article last February providing you a critical discussion of the last 15-year corporate history of Rite Aid (NYSE:RAD). It included examples of senior-level gross incompetence or simple mismanagement, board malfeasance including poor decision-making and self-dealing, cronyism, and let us not forget personal corporate greed, which this shareholder believes was the prime motivator to sell the company to Walgreens (NASDAQ:WBA) now.

The senior management and its directors have surrendered their long-term road to maximization of shareholder equity for the short-term goal of personal and immediate wealth and turned the "potential" corporate keys over to Walgreens, with apparent new jobs already waiting for some of them at Fred's (NASDAQ:FRED). A win-win for them, not so much for the Rite Aid common shareholder.

Walgreens, in turn, which has been the sole mouthpiece for both itself and Rite Aid, has been slick in its public comments during this extended merger process, thanks to the FTC and both companies' anti-trust law firms, which provided bad advice on required divestiture totals. All this, and a Walgreens hit to its credibility, have severely and unusually depressed Rite Aid's stock price, in part due to RAD's continuing poor renegotiation of the agreement. But is all this a hidden goldmine opportunity for huge profits in future Rite Aid price appreciation if you were to add or begin a new position in it?

Let's step right up and be a contestant in some game show decisions. Depending on when you buy in or sell out along the way, a correct spin of "the Wheel of Fortune" could land you on significant profits or land you on a "lose a turn" or "bankrupt". Do you take the money and run along the way or do you participate in the bonus round of "Let's Make a Deal" and trade-in your existing profits, if any, to open up one of three doors towards the end of this merger soap opera? I will attempt to guide you in order of assumed highest probable outcome first. However, keep in mind, it is impossible to predict the lowest low or highest high a stock will get to in a limited amount of time. Although I provide stock prices below, based on certain events, they should be looked at as a trend up or down after critical news is reported only, and not that the specific price would ever be reached or alternatively be broken through.

Door Number One

If you pick this door, Walgreens squeaks by and convinces the FTC to issue a consent order allowing Fred's to purchase 1,200 divested stores. Rite Aid shareholders receive $6.50 per share, meaning if you first bought shares several weeks ago at $4.20, you made 50% percent on your money! If you bought after January 30, you did not lose money, made a little, congratulations still.

Door Number Two

The FTC sues Walgreens to block the merger and both investors in Walgreens and Rite Aid head emotionally to the exits; Kleenex stock soars! But wait, put the Kleenex aside, temporarily, because this door number two has one of two decent consolation prizes:

A. Simultaneously with the FTC news, Walgreens announces that its lawyers will vigorously defend in court (with Rite Aid giving it whatever time it needs for a verdict) and likely win. While investors wait for a decision, the stock would trade in the high $3s, and upon a successful Walgreens outcome, once again if you bought now, again you made more than 50% percent.

B. Walgreens delays an immediate press release on its lawyers defending in court and drives the Rite Aid stock down to under $3.50 per share temporarily, until it announces it will defend in court. Back up to the high $3s, with a fast 10% percent gain if you bought on the initial FTC news, while you wait for a court verdict if that is what you decide.

And how do I know that Walgreens will elect to defend itself in court? Because Mr. Pessina just told you so! Words have meaning and are powerful. Last week, during Walgreens' earnings call, Mr. Pessina said, and I quote:

"I believe we have a strong argument to defend this deal."

Some here may want to interpret these remarks differently; I interpret them to mean "Here comes the judge."

Further, I believe Walgreens will win in court since the court will be focused on only one thing - can the FTC play judge and jury on future events; is its crystal ball that infallible? Can it predict the future after Fred's clearly has financing in place (assumed here for 1,200 divestitures, although so far only 865 stores were announced previously), has fortified its board with heavyweight drugstore and retail executives, has had over six months to build corporate infrastructure to support these additional stores, and has a solid agreement from Walgreens to assist it in initially getting up to speed. Is the American way to encourage entrepreneurship or to unreasonably throw cold water on it? I do not believe it could do any worse than Rite Aid. Indeed, I would not let the FTC know about the fact that the preliminary proxies indicate that some Rite Aid employees have already interviewed for jobs at Fred's.

Door Number Three

Now get the Kleenex ready again, temporarily...

Walgreens walks away from an FTC block of the merger or Rite Aid shareholders control the show by voting "Against" at the Special Shareholder Meeting. The institutional shareholders who have had more than 60% percent of the common stock ultimately decide this, but after all this time, if the FTC allows the merger to occur, you would think (in your fantasies) that the institutions would band together to vote "Against" to force Walgreens to step up and pay a little more to in effect still steal Rite Aid for a song. Rite Aid's stock likely initially trades under $3.50, not the $2.25 as one analyst suggests (and some here are already regurgitating) for his notoriety's sake and unlikely in reality.

This most unlikely scenario out of the three available doors is potentially the most financially rewarding one. Simply because Rite Aid's senior management's "business as usual" attempt thereafter will not be allowed to continue if activists or other acquirers have their say. Currently, any potential other acquirers are hiding in the bushes, waiting to see what the FTC or Walgreens might do. Why get involved now when you can wait for further developments first to offer more clarity. Indeed, the definitive proxies for the Rite Aid shareholder vote have not even been mailed yet, nor has a date for the Special Shareholder Meeting even been announced.

Activists, on the other hand, know that Rite Aid senior management/directors have once again been placed in an undesirable spotlight where even more poor decisions from beginning to end in this merger process have been made by them, leaving very unhappy investors in the dust. These activists, if any were to materialize, can start a proxy fight for control of many board seats (should the board refuse to peacefully allow them representation on it) given their newly announced position(s), get the required majority shareholder vote, remove senior management and make the kind of decisions that are finally and mercifully in the shareholder interest. A new board would no longer be representing the personal corporate greed of executives looking to cash out at common shareholder expense. Activists, unlike the current board/senior management, would have had to open up their own wallets, buy common shares, and are now on the same side of the negotiation table as shareholders.

The Correct Activist Steps

A refreshed board and refreshed senior management would decide which of the two regions to keep - either the West or East Coast, the two existing crown jewels of Rite Aid. Select one of them, and sell off the rest of the store base to one or multiple buyers over time and dramatically reduce the unacceptable debt. Presto, Wall Street rewards the company on its dramatically improved creditworthiness, as well as income floating down to the bottom line of the balance sheet, instead of bankers' pockets; and the stock soars. Thereafter, the new Rite Aid works on improving store execution on the piece kept, gain back customers it lost years ago to Walgreens and CVS due to prior chronic mismanagement and wait several years down the road for an offer from an acquirer to purchase this last part retained. The combined value of all pieces would certainly be more than offered by Walgreens today; try a "double-digit" figure many of you here on Seeking Alpha have been fantasizing about for years. Sorry, Rite Aid executives, in this scenario, you will not get your change in control goodies you are currently salivating for with a Walgreens merger, but last I looked, you are working for us, not the other way around.

Seem too easy you say? Maybe, but years of knowing how this company ticks suggests to me that this does not have to be a dream. Not to worry though, because happily, or not for some of you, door number 1 holds the most realistic parting gift for all contestants here. Life is not always fair, directors/senior executives end up working for themselves and not the common shareholder who hires them, and personal greed almost always is the winner. Unless the institutions, holding the majority of shares, put on their big boy pants and see this merger for what it is - namely an inadequate per share price for Rite Aid investors. If given the opportunity to band together to vote "Against" when they receive their proxy material, assuming the FTC has already voted to allow the merger, they could bring Walgreens back to the negotiation table. If the institutions act as usual, wanting to take the money and run, then Rite Aid shareholders will have to be content with $6.50 per share.

Disclosure: I am/we are long RAD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Fifteen-year common shareholder, with all profits from this article and long position in Rite Aid (240,000 shares at one point) going to local animal rescue.