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Is Rite Aid deal better than no deal at all?

July 1, 2017

Walgreens Boots Alliance Inc
WBA 0.08%
proposed back in 2015 to fully acquire Rite Aid Corporation
RAD 2.08%
in a deal that would value the smaller pharmacy retail chain at $9 per share.

But regulatory concerns are part of the reason why the merger agreement is officially off the table. Instead, Walgreens will buy just 2,186 stores, along with three distribution centers and related inventory, for $5.175 billion. Rite Aid’s investors were left disappointed as shares hit a multi-year low of $2.61 on Friday.

Nevertheless, investors should be positive on the deal as Rite Aid is now in a better position it would have been if no deal had been made, Cowen’s Charles Rhyee commented in a research report. There are many benefits from the transaction, including deleverage, lower generic procurement costs, greater leverage toward in the pharmacy benefit manager space and increased financial flexibility.

Focus On PBM

After divesting many of Rite Aid’s retail stores, the PBM segment will now account for a greater amount of overall sales and profitability, the analyst continued. This will naturally benefit Rite Aid from a valuation point of view as PBM companies typically trade at a premium versus drug dealers.

Also, top- and bottom-line growth of the slimmer Rite Aid company will improve given the higher growth profile of the PBM segment, which is growing at a faster pace versus the overall retail space.

Shares of Rite Aid remain Outperform rated with an unchanged $4.70 price target.

At last check, shares of Rite Aid were down 4.67 percent at $2.76.

Latest Ratings for RAD

Date Firm Action From To
Jun 2017 Evercore ISI Group Reinstates Underperform
Apr 2016 Deutsche Bank Downgrades Buy Hold
Mar 2016 Credit Suisse Assumes Outperform

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