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Rite Aid upside 124%, downside 28% in coming FTC vote: Deutsche Bank

June 24, 2017

After nearly 2 years of dragging its feet, the FTC decision on Walgreens (NYSE: WBA)/Rite Aid (NYSE: RAD) is finally upon us. While the FTC is not confirming or denying the official date, all signs point to the vote being held next week. The FTC technically has until July 7 to vote, after the companies forced the FTC’s hand by certifying compliance in early May, however, with July 3-7 being a holiday week it makes sense that they will vote next week as Capital Forum reported yesterday.

Big money is on the line either way.

If the FTC surprises markets and lets the deal through, RAD investors can immediately more than double their money (ex-typical deal spread). With shares currently trading at $3.13 and a deal price of $6.50-$7, those buying shares at current levels stand to gain 108%-124%. Fred’s (NASDAQ: FRED), which is buying at least 865 Rite Aid stores as part of the deal, could also see enormous gains if the deal is approved.

Meanwhile, if the FTC turns away the deal, Rite Aid shares, already down 50% since the October 2015 merger announcement, could see further downside. Deutsche Bank analyst George Hill recently warned that Rite Aid’s stock could drop to ~$2.25 per share, or 28% downside if the Walgreens (NYSE: WBA) deal falls through. Others see a fair value closer or above current valuations if the deal fails.

The downside in Rite Aid shares could be mitigated as some takeover premium could be assigned on hopes another suitor, like Amazon (NASDAQ: AMZN), comes to the table. Also, there is a chance Walgreens litigates to win approval, although consensus appears to be that they will walk.


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