Why Kroger Co Does Not Dictate The Walgreens Rite Aid Merger (KR) (WBA) (RAD)

- October 27, 2016
illustration by Chad Boggs

illustration by Chad Boggs

Just five days after Walgreens Boots Alliance (NASDAQ:WBA) extended the deadline for its Walgreens Rite Aid merger, and Rite Aid Corporation‘s (NYSE:RAD) stock jumped 6.5%, RAD stock has fallen to a new 52-week low and has given back all of its gains. Importantly, Walgreens gave investors no reason to believe the Rite Aid merger will fall apart. In fact, WBA continues to be very optimistic just a couple months ahead of the expected closing; after months of discussion with regulators.

There is no question that what’s pushing RAD stock lower is the known fact that Walgreens must divest upwards of 700 Rite Aid stores to appease regulators. Walgreens previously said it would divest 1,000 stores. Investors have doubt that Walgreens will find a buyer, and according to a NY Post article, The Kroger Co (NYSE:KR) is backing off as a suitor to acquire those stores.

Ever since that NY Post report, RAD stock has crashed lower with no end in sight. It is almost as if Kroger itself announced no interest in the stores. Instead, Bloomberg reported the same exact day of the NY Post story that Kroger leaked the story as a bargaining tool, something that is very common in M&A. Fact is it would make perfect sense for Kroger to leak the news if it was  involved in the purchase of those stores.

Still, the underlying point is that RAD stock now trades at a near 35% discount to Walgreens buyout price, and neither Walgreens, Rite Aid, nor any regulatory office has provided any indication that the merger will not close as expected. Yes, there is the issue of stores that Walgreens must get rid of, but before you buy into the Kroger dilemma, stop and consider that Kroger is not the only suitor out there.

Kroger does not make sense

I can’t stress enough that Walgreens planned to divest up to 1,000 stores. By all accounts, the number is closer to 700. That’s about 5% of the combined store count.

The Rite Aid buyout price considered the fact that Walgreens would have to get rid of these stores, yet WBA still made a $9/share offer. Walgreens just has to get rid of these stores to make the deal go through. As a result, there is no reason to believe that Walgreens will push an acquirer too hard on price.

If in fact there are active and somewhat difficult negotiations between Walgreens and Kroger, it is likely because Walgreens has other buyers. Yes, the market seemingly believes that Kroger is the only buyer, but in retrospect, Kroger isn’t even a good suitor.

If we look at Kroger’s growth strategy, it has gone bigger while others have gone smaller. Over the years we have watched Kroger expand from grocery retail and into home decor, jewelry, banking, clothing, etc.

Kroger has made its stores bigger while many others have gone smaller. So while it is possible that Kroger buys the Rite Aid stores from Walgreens, I don’t think it is the most likely buyer.

Why Kroger is irrelevant to Walgreens Rite Aid merger

Just think of the companies that could buy these 700 stores, and remember that Walgreens will be willing to sell the assets cheap to get this deal done.

Continue to “Page 2” for a list of companies that could buy Rite Aid’s 700 stores from Walgreens.

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