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There’s been a lot of drama in the merger between Rite Aid Corporation (NYSE:RAD) and Walgreens Boots Alliance Inc (NASDAQ:WBA). As doubts lingered about whether the Federal Trade Commission would approve the deal, RAD stock continued to sink to new lows. After what felt like a lifetime, reports finally began coming out at rapid fire.
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Some said the FTC was going to file a lawsuit to block the merger. A few days later, another said it was likely to approve the deal. WBA management took matters into its own hands and began reworking the deal with RAD, agreeing to pay a $325 million termination fee.
Instead, Walgreens will now pay $5.175 billion in cash for 2,186 retail location, three distribution centers and inventory. Fred’s, Inc. (NASDAQ:FRED) has been cut out of the deal altogether, which allows WBA to expand its footprint. Management says it will realize more than $400 million in synergies.
Breaking it Down for Rite Aid
It’s clear to see why this may benefit Walgreens, but is it good or bad news for RAD stock? Assuming this deal finds approval, WBA says it will take about six months to close. A lot of comments suggest that investors feel fleeced under the current deal. The market shares the concern, with Rite Aid stock hovering about 20 cents per share above its 52-week low of $2.21.
In the end, Rite Aid will have approximately 2,350 stores remaining. However, management says it will still operate some of its best-performing locations, mainly on the West Coast and throughout parts of the Midwest.
If that’s the case — and that’s a big if — RAD could survive.
Let’s look at the whole picture. Last quarter, the company had total debt of $7.24 billion. The $5.2 billion directly cuts that figure down significantly, equaling almost 75% of the total sum. The $325 million breakup fee can also go toward the debt, but may make more sense to go toward the $214 million in cash. That gives the company more money in the bank and allows it have additional flexibility going forward.
In the deal, WBA is buying almost 50% of RAD locations. After subtracting cost of goods sold, RAD stock had a gross profit of $1.759 billion last quarter. Taking out SG&A expenses put it in the red as RAD ultimately lost $75 million though. The hope is that Rite Aid is left with more profitable stores — like management says — while also cutting its overhead costs significantly. That could allow the company to turn a profit and boost its gross margins.