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Will Walgreens Gain from Revised Rite Aid Agreement?

Over the past few months pharmacy-led, health and well-being enterprise giant Walgreens Boots Alliance WBA was caught in speculation over resolving the regulatory hurdle to acquire the U.S. retail pharmacy chain Rite Aid. However, looking at FTC’s (Federal Trade Commission) approach on the merger deal over the last couple of months, we see that this particular move might end on an unhappy note.

Investors are still in shock about Walgreens’ shelving of the $17 billion acquisition deal last week, which had once promised a strong platform for developing the companys’ brand presence as well as its overall future business growth. However, we believe that there is much hope on the company’s revised agreement with Rite Aid.

Delving into the latest deal’s details, it is understood that the new agreement would enable Walgreens to buy nearly half of the Rite Aid business at a deal value, almost one-third of the original price.

More specifically, Walgreens will purchase nearly 2,186 stores, three distribution centers and a related inventory from Rite Aid for $5.175 billion in cash. Notably, Rite Aid ran about 4,523 stores across 31 states and the District of Columbia as of Jun 3, 2017.

This apart, the deal’s financial outcome is pretty attractive. Post the new transaction’s initial closing, Walgreens expects it to be modestly accretive to its adjusted diluted net earnings per share in the first full year. Synergies from this new takeover are expected in excess of $400 million, to be entirely realized within three to four years of its initial closing.  

Per Walgreens, this modified merger contract will also extend its growth strategy and offer additional operational plus financial benefits. It will help the company expand and optimize its retail pharmacy network in the key, including the Northeast. This partial consolidation with Rite Aid will help Walgreens gain a competitive edge.

Price Performance

The fueling rumor of FTC’s ‘preparing’ to block the huge $17 billion Walgreens-Rite Aid merger deal has taken quite a toll on Walgreens’ stock price over the  past three months.

The stock has lost 4.5%, wider than the 1.6% decline of the broader Retail - Pharmacies and Drug Stores industry during this period. The market pessimism continues to persist despite announcement of the deal’s modified version. However, we believe that this is a momentary phase and expect investors to soon realize the ‘healthier’ part of the improved agreement only to help the stock to rebound.

Key Picks

Walgreenscurrently carries a Zacks Rank #3 (Hold).Some other top-ranked medical stocks are Mesa Laboratories, Inc. MLAB, Inogen, Inc. INGN and Align Technology, Inc. ALGN. Notably, Mesa Laboratories and Inogen sport a Zacks Rank #1(Strong Buy), while Align Technology carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Mesa Laboratories has a positive earnings surprise of 2.84% over the last four trailing quarters. The stock has roughly appreciated 10.9% over the last three months.

Inogen has a long-term expected earnings growth rate of 17.5%. The stock has surged 25.6% over the last three months.

Align Technology has an expected long-term adjusted earnings growth of almost 24.1%. The stock has roughly rallied 31.9% over the last three months.

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