Walgreens Boots Alliance (NASDAQ:WBA) needed to divest 700 stores to appease regulators and complete the Rite Aid Corporation (NYSE:RAD) acquisition. Turns out, Fred’s Inc (NASDAQ:FRED) bought 865 stores, 165 more than the magic number.
Back in early November, RAD stock fell to a low of $6.40 when the market feared that Walgreens would not find a buyer, back when the NY Post was reporting that Kroger was playing hard to get.
BNL Finance reported that Kroger’s interest was irrelevant, and even mentioned Fred’s as a possible buyer. As usual when it pertains to RAD stock, we were right.
With that said, the Rite Aid buyout is pretty much a done deal. Not only has Walgreens reiterated several times that it expects the deal to close soon, but it has done so during ongoing discussions with regulators. Hence, if the deal were going to be blocked, Walgreens would have a good indication, and would be preparing WBA stock owners.
Given these developments coupled with Walgreens’s all-cash offer, it seems right that RAD stock would trade at $8.60 for a much smaller arbitrage opportunity of 4.5% before the Rite Aid buyout closes. That’s where it traded following the Fred’s announcement.
In the two days since, Rite Aid stock has fallen $0.20 to $8.40. What makes this surprising is the extremely low chance that the Rite Aid buyout is stopped. Thus, a merger arbitrage investment opportunity with 7% upside that appreciates within months, and has very low probability of failure is almost impossible to find.
We already upped the ante in the BNL Portfolio, but will be watching RAD stock closely over the next week or two for an opportunity to increase the stake even more. Fact is if you plan to hold cash in 2017, Rite Aid stock is about equal risk and will significantly outperform stocks. That’s a dream scenario.