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In Walgreens-Rite Aid Deal, $1 Billion in Synergies on the Table

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Current status of the WBA-RAD deal

In October 2015, Walgreens Boots Alliance (WBA) announced its intention to acquire Rite Aid (RAD) for a total enterprise value of $17.2 billion. One year later, WBA is still awaiting approval from the FTC (US Federal Trade Commission), which has asked WBA to shut or sell around 650 of its stores, amounting to ~5% of the WBA-RAD combined store count.

WBA is now looking for buyers—preferably a single buyer—for its stores. But according to the New York Post, private equity firms are not too interested in WBA’s stores because they are scattered across the country and are not in high-quality locations. The New York Post also reported that Walgreens and CVS Health (CVS) recently met with FTC officials. The meeting might be in connection with CVS’s interest in WBA’s stores.

Despite these headwinds, WBA expects the transaction to close in the second half of calendar 2016.

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What does Walgreens get from the Rite Aid deal?

Rite Aid’s acquisition should improve Walgreens’ footprint across the US, increasing its store count by over 50%. WBA’s total US store count would touch 13,000 after the deal’s completion. The merged entity would be in a position to better handle the increasing competition from supermarkets and mass merchants like Kroger (KR) and Wal-Mart Stores (WMT), which are increasingly posing tougher competition for drug retail companies.

Walgreens expects to realize synergies of around $1 billion from the acquisition, most of which would come from procurement, cost savings, and other internal efficiencies. The synergies would entirely be within Walgreens’ US Retail Pharmacy division. Walgreens also expects the acquisition to be accretive to its EPS (earnings per share) in the first year of deal closure.

Notably, ETF investors seeking to add exposure to WBA can consider the iShares US Consumer Services ETF (IYC), which has ~2.4% of its portfolio in WBA.

In the next part, we’ll look at Walgreens’ performance in the recent most quarter.

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