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John123 in Mergers & Acquisitions,

Rite Aid surged 44% on Walgreens acquisition

Drugstore chain Walgreens Boots Alliance Inc (WBA) said on Tuesday it would acquire smaller peer Rite Aid Corp (RAD) for $9.4 billion to widen its footprint in the United States and negotiate for lower drug costs.

The $9-a-share cash deal, worth $17.2 billion including acquired debt, will increase the footprint of Walgreens, the largest U.S. drugstore chain, by half. It will also improve its ability to negotiate for low drug prices and fend off rivals from Wal-Mart Stores Inc to online pharmacies.

The price represents a 48 percent premium to where Rite-Aid shares closed on Monday, the day before the agreement was signed, the companies said in a joint release.

A Walgreens-Rite Aid deal would need approval from the U.S. Federal Trade Commission, which studies retail mergers to ensure they comply with antitrust law.

Shares of Rite Aid, which had a market value of $6.36 billion at Monday's close, rose as much as 44 percent on Tuesday after the Wall Street Journal first reported the deal talks. Walgreens stock rose as much as 7 percent.

Walgreens said it expects the transaction to close in the second half of 2016 and to boost its earnings per share in the first full year after its completion.

The combination is promising $1 billion of savings. Likely sources include closing duplicate headquarters and overlapping corporate functions. The enlarged company should also enjoy better bargaining power with suppliers at a time when pricing pressure from insurers and pharmacy benefit managers is squeezing profits across the sector. It also gives Walgreens entrée into the pharmacy benefits management trade, a business that CVS has used to distinguish itself from the retail competition.

Moreover, Rite Aid's stock price had fallen 30 percent since mid September, when it cut its full-year forecast citing revenue pressures, giving Walgreens an opportunity to expand its footprint at a more attractive price. After Tuesday's share price jump, Rite Aid's shares were still trading well below the highs they hit in August.

I think this acquisition really makes sense and WBA looks interesting for medium-term longs.