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Rite-Aid Merger Update

|About: Rite Aid Corporation (RAD), WBA, Includes: FRED

Summary

Quick update on the RAD/WBA merger

Purchase price dropped to $6.5-7.00 per share

Deal extended to obtain more regulatory approvals

Rite-aid (RAD) and Walgreens Boot Alliance (WBA) have been working relentlessly to receive regulatory approvals in order to clear the merger in a timely manner. Earlier this year we witnessed Walgreens reduce the purchase price to $6.5-7.00 per share, dependent on the number of stores divested. Both parties have spent over 15 months working on this deal. Unfortunately even with a closed deal, Rite-Aid shareholders have lost a lot of value.

The revised merger agreement extends the deal deadline to the end of July. This is an eternity in merger arbitrage. Extending the deal deadline substantially lowers the internal rate of return (IRR) for funds like ours. At this point our job is to ensure the deal gets done and minimizes any further value destruction. I believe it is in the best interest for Walgreens and Rite-Aid to close the deal and on an accelerated timeline.

The deal was extended in order to obtain the necessary regulatory approvals. Fred’s pharmacy (FRED) has been working closely with Walgreens and Rite-Aid to carry out their purchase agreement.

For investors interested in learning more about arbitrage deals, I would suggest checking out InsideArbitrage.com, written by fellow SA contributor Arif Suria. His website does a terrific job providing updates on insider transactions and merger arbitrage. Below are some of the major points from his site regarding the Rite-Aid deal:

  • December 20, 2016: Walgreens Boots Alliance (WBA) and Rite Aid Corporation (RAD) announced that they have entered into an agreement to sell 865 Rite Aid stores and certain assets related to store operations to Fred’s (FRED) for $950 million in an all-cash transaction.

  • January 20, 2017: Rite Aid (RAD) shares were halted after falling 18% on reports that the FTC will not approve Walgreens Boots Alliance's (WBA) acquisition of the company, even after the two sides promised store divestitures to Fred's (FRED).

  • January 30, 2017: Walgreens Boots Alliance (WBA) and Rite Aid Corporation (RAD) announced that they have entered into an amendment and extension of their previously announced definitive merger agreement. Under the terms of the amendment, the parties have agreed to reduce the price for each share of Rite Aid common stock to be paid by Walgreens Boots Alliance. The revised price will be a maximum of $7.00 per share and a minimum of $6.50 per share.

  • March 15, 2017: Walgreens Boots Alliance (WBA) is trying to secure a deal to sell more locations and assets to Fred’s (FRED) so that it can meet regulatory approval to acquire Rite Aid (RAD).

  • March 16, 2017: As Walgreens Boots Alliance's (WBA) acquisition of Rite Aid (RAD) nears FTC approval, Fred's has added several directors with retail experience to its board.

It is interesting to note that the FTC has been working with all of the parties on this deal. If the FTC didn’t find the deal suitable, they would have ended the merger months ago. We view this as a positive sign and expect the deal to close soon. RAD will report fourth quarter results on April 25th and will likely release news related to the merger. 

Disclosure: I am/we are long RAD,.

Additional disclosure: At the time of this commentary Vijar Kohli, his family and/or clients of Golden Door Asset Management were long Rite-Aid Corporation (RAD) - although positions can change at any time. Vijar Kohli is the Portfolio Manager of Golden Door Asset Management, LLC, a registered investment advisor specializing in individual and high net worth individual portfolio management. For more information on investing with Golden Door Asset Management, LLC please visit our website, www.goldendoorasset.com. Golden Door Asset Management, LLC is a New Jersey LLC, with its principal office located in Hoboken, NJ. © 2016 Golden Door Asset Management, LLC. All rights reserved.