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Blockbuster Deal: Walgreens Boots Alliance Proposed to Buy Rite Aid

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Blockbuster Deal: Walgreens Boots Alliance Proposed to Buy Rite Aid PART 1 OF 6

Walgreens-Rite Aid Deal: What’s It All About?

Overview of the proposed deal

On October 27, 2015, Walgreens Boots Alliance (WBA) announced its intention to acquire Rite Aid (RAD). Walgreens proposed to acquire Rite Aid for a total enterprise value of ~$17.2 billion. This included acquired net debt of $9.3 billion.

Walgreens-Rite Aid Deal: What&#8217;s It All About?

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Market reaction

The markets received the Walgreens-Rite Aid deal announcement well. Both companies’ stock prices rose after the announcement. Rite Aid’s stock rose 43% to $8.67 on the day of the announcement. Walgreens’ shares rose 6.3% to $95.16.   

However, the shares of Rite Aid’s drug distributor McKesson (MCK) fell 4.1%. AmerisourceBergen’s (ABC) shares, Walgreens’ distribution partner for medications, rose 4.2%.

Basics of the deal

Walgreens agreed to pay $9 per share in cash to Rite Aid. This includes a premium of 48% to the closing share price on the day before the announcement.

The financing will be through a combination of existing cash, the assumption of existing Rite Aid debt, and the issuance of new debt. Walgreens expects the transaction to be accretive to its bottom line in the first full year after the completion. Also, Walgreens expects to save more than $1 billion in synergies. The transaction will likely close in 2H16.

After the acquisition is complete, Rite Aid will operate as a wholly owned subsidiary of Walgreens Boots Alliance. Rite Aid stores would initially operate under the same store name. However, Walgreens might transform the Rite Aid stores later on.

The deal unites two of the three biggest drugstore owners in the US. It has to be approved by antitrust regulators. The FTC (Federal Trade Commission) might object to the idea of the US drugstore market turning into a duopoly. It could push for some store closures in order to grant approval.

ETF exposure

With sales of over $103 billion in fiscal 2015, Walgreens Boots Alliance has a weight of ~1.9% in the PowerShares QQQ Trust (QQQ) and ~4.4% in the SPDR Consumer Staples Select Sector ETF (XLP).

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