On Monday, Walgreens Boots Alliance (WBA) and Rite Aid (RAD) said they agreed to reduce the price Rite Aid shareholders will receive from the proposed buyout of their company by Walgreens. Rite Aid shares plummeted on the news in pre-market trading and currently trade down over 17% to $5.70. The revised price cuts the per share price being paid for Rite Aid stock from $9 to a maximum of $7 per share and a minimum of $6.50 per share.
The Federal Trade Commission says Walgreens’ offer to divest 865 Rite Aid stores in order is not sufficient to receive antitrust approval in the US. Walgreens, a holding in the Action Alerts PLUS portfolio managed by Jim Cramer, said its new agreement with Rite Aid obligates Walgreens to divest up to 1,200 Rite Aid stores and certain additional related assets if required for FTC approval.
To accommodate the continued discussions with the FTC, Walgreens and Rite Aid agreed to extend the end date under the previously announced agreement from January 27, 2017 to July 31, 2017.
“If the merger is approved, we expect shares to push higher, and if the merger is rejected, we believe the company’s capital optionality becomes extremely attractive,” Cramer and co-portfolio manager Jack Mohr wrote in a recent note about Walgreens. “We look to be buyers on any near-term selloff under $80. We reiterate our $90 target.” Walgreens shares currently trade at $82, which is up nearly 1%.
The exact per share of Walgreen’s offer will be determined based on the number of required store divestitures. If 1,000 stores or fewer are required for divestiture, Rite Aid shareholders will receive $7 per share. If 1,200 stores are required for divestiture, they will get $6.50 per share. If the required divestitures fall between 1,000 and 1,200 stores, the per share price will be set according to pro-rata adjustment.
As one of the country’s largest companies, Walgreen’s has carefully crafted this deal to appease regulators and create WBA stock holder value. However, there is still no way to determine what the FTC may conclude. The question is, will the FTC approve the merger? Already, the market is suggesting a 50/50 chance that the Rite Aid buyout will be completed, and the chances rise significantly with a FTC led by the Trump administration. What will be the final decision?