Finanzas: Rite-Aid: This Buyout Needs To Happen

 

The Walgreens/Rite Aid deal is close, but data suggests the merger is needed.

I discuss fiscal Q3 results.


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Recall that when I initiated coverage on Walgreens Boots Alliance (NASDAQ:WBA), I spoke about its success as a company. I also went on to discuss the Rite Aid (NYSE:RAD) acquisition. The truth is that we simply just do not know how accretive the deal will be, and I haven’t seen any solid estimates that are reliable. Knowing the business, it’s a huge acquisition. While the Rite Aid acquisition was approved by shareholders, some have claimed the deal is dead. I think not. It is closer than ever. The companies are both sacrificing to make it work. The companies together divested 500 stores in order to get federal permission on the merger. Then the company just announced it would sell 865 stores to Fred’s Inc. to make it happen. While we just do not know the impact, if the deal goes through, which appears it will soon, my inclination is that like any other major merger, at first, the deal will be costly as the processes are integrated, stores are closed, employees moved, etc. Then, say a year or so later, things will be accretive, especially if WBA can cut the selling and administrative expenses. We will see. But, of course, Rite-Aid’s operations need to be earnings/cash flow positive to be accretive. So, on that note, I want to discuss Rite Aid’s just reported fiscal Q3 2017.

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It was less than stellar. What do I mean? Well, in fiscal Q2 2017, the company saw revenues of $8.09 billion, which missed estimates by $140 million. Further, these were down 0.7% year-over-year. Now, in addition to the sales miss, the bottom line saw as miss as well. Net income came in at $15 million, or $0.01 per diluted share. On an adjusted basis, adjusted net income was $23.3 million, or $0.02 per share, while adjusted EBITDA was $274, or 3.9% of revenues. It’s important to note that both adjusted EBITDA and net earnings were down markedly from last year. What is the deal here?

Fuente: Seeking Alpha


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