I’ve been reading about the merger between Walgreens (WAG) and Rite-AID (RAD) since last year. I never was too interested in taking a position in this merger & acquisition candidate but with the recent sell-off the risk vs. reward is much better now. I am also more confident in seeing a happy-ending to this scenario.
Originally, Walgreens was going to purchase Rite-Aid at a all-cash offer of $9 per share. At that time, Rite-Aid was selling for over $6-7 which offered a nice 10% return to investors. However, FTC didn’t like the deal and told Walgreens that they had to sell more stores to Fred or they won’t allow the purchase to take place. Walgreens already said agreed to sell 800 stores to Fred. FTC wants them to sell at least 1000 stores. This also means that Walgreens will give less cash to Rite-Aid. After hearing about this news, many investors holding Rite-Aid for over a year awaiting the merger and others holding the stock option gave up and sold their shares.
Now, the current price of Rite-Aid is around $4.50 (give or take a few cents) and Walgreens is planning to give $6.50 to $7.00 cash per share depending on the number of stores they need to divest to Fred. There are a few different ways to take advantage of this opportunity.
First, Walgreens is actually in a better position. They can get rid of more stores that they do not want. Fred is happy to take over these stores since they want smaller stores that Walgreens would consider smaller towns that they are happy to give up and give less money to purchase Rite-Aid.
Second, Rite-Aid stock price is very undervalued now that even other acquirers should start throwing a deal out on Rite-Aid if Walgreens fails to acquire the company. Rite-Aid does have a lot of debt but for the right investor they could use that debt as a write-off and still win at the current stock price.
Ok, let’s look at the returns. At a price of $4.60 and a cash out of $6.50, you are getting $1.90 per share giving you a return of 41%! That’s great!! However, if you want to get even more leverage and play a little safer as well, you can sell naked August 2018 Puts at a strike price $4 for around $0.65 so you would get a nice $650 for 10 contracts. At worse case, the stock drops and you have to purchase at $4 but you already have $.65 so your stock basis would actually be $3.35. I think this gives you plenty of wiggle room to wait until the stock price appreciations.
I think Walgreens or some other acquirer would be interested in this company. I also think Rite-Aid can run on its own and figure a solution to get the price higher. Either way, I feel the current price is a good one to get into Rite-Aid.
Disclosure: I do have naked puts in Rite-Aid currently and plan to purchase some stock for a long-term play.
Leave a Reply