Rationale for the Rite Aid–Walgreens Merger

The Rite Aid-Walgreens merger is the next step for Walgreens Boots Alliance (WBA) to compete with rival CVS Pharmacy (CVS). Rite Aid got into the pharmacy benefit management business earlier this year when it purchased Envision Pharmaceutical Services from private equity firm TPG for $2 billion. Walgreen’s purchase is somewhat opportunistic after the company lowered profit estimates in mid-September. The merger will give the company more negotiating power with the big drug companies.

“Today’s announcement is another step in Walgreens Boots Alliance’s global development and continues our profitable growth strategy. In both mature and newer markets across the world, our approach is to advance and broaden the delivery of retail health, well-being and beauty products and services,” said Stefano Pessina, Walgreens Boots Alliance’s executive vice chairman and CEO. “This combination will further strengthen our commitment to making quality healthcare accessible to more customers and patients. Our complementary retail pharmacy footprints in the US will create an even better network, with more health and wellness solutions available in stores and online. Walgreens Boots Alliance will provide to Rite Aid its global expertise and resources to accelerate the delivery of integrated frontline care, and to offer innovative solutions for providers, payers and other entities in the US healthcare system. Finally, this combination will generate a stronger base for sustainable growth and investment into Rite Aid stores, while realizing synergies over time.”

The transaction is expected to be accretive to Walgreens Boots Alliance’s adjusted earnings per share in the first year after completion. The companies anticipate synergies of more than $1 billion per year.

Other important merger spreads include the Cigna Corporation (CI)–Anthem (ANTM) deal, which is slated to close in 2H15. For a primer on risk arbitrage investing, read “Merger Arbitrage Must-Knows: A Key Guide for Investors.”

Investors who are interested in trading in the healthcare sector can look at the S&P SPDR Healthcare ETF (XLV).