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The WBA-RAD Deal Drama Has Hurt Both Companies’ Stocks

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WBA-RAD enter new agreement

On June 29, 2017, Walgreens Boots Alliance (WBA) and Rite Aid (RAD) announced that they have a new definitive agreement, scrapping all the previous deals. Under this agreement, Walgreens will purchase 2,186 Rite Aid stores, which is about half the number it had agreed to buy earlier. In addition, the company will buy Rite Aid’s three warehouses and any related inventory.

The deal is valued at $5.2 billion, which Walgreens will pay in cash. For comparison, the original deal signed in October 2015 was valued at $17.2 billion, while the revised one was valued at ~$14 billion.

Stefano Pessina, Walgreens’s CEO, said during the conference call, “where there is a will, there is a way, that 2 willing partners can, despite adversity, find a deal that delivers true benefits for both.”

As a part of the deal, Rite Aid will also be granted an option to become a member of Walgreens Boots Alliance Development GmbH. Rite Aid can exercise this option through May 2019.

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Stock market reaction to the new deal

Rite Aid’s stock price crashed 26.5% after the new deal was announced. Rite Aid’s (RAD) weak quarterly results announced on June 29 also contributed to this decline.

Walgreens, however, rose 1.7% to close at $78.37 on June 29. The company is trading 12.3% below its 52-week high price and has lost 5.3% year-to-date. It has lost around 18% since October 27, 2015, the day when the merger was originally announced.

However, Rite Aid has lost 66% during the above-mentioned period and has been quite sensitive to any news/speculations related to the deal.

ETF investors seeking to add exposure to WBA or RAD can consider the SPDR S&P Retail ETF (XRT), which invests 2.4% of its combined portfolio in the two companies.

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