Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is Right Aid Really a good Investment for Walgreen?

Lately many investors have been wondering if Rite Aid (NYSE: RAD) is really worth the $9.4 billion Walgreen Boots Alliance (NASDAQ: WBA) is paying for it.

The deal seems to be taking far too long because of entanglements at the Federal Trade Commission (FTC). To make matters worse, Walgreen may have to sell or close around 650 stores just to get the FTC to approve the merger.

If that was not bad enough The New York Post reported that private equity firms are not interested in all those Rite Aid locations. That means Walgreens will either have to close them or sell them at a low price to a competitor; like Kroger (NYSE: KR), or CVS Health (NYSE: CVS).

Is Rite Aid Really Worth $9.4 Billion?

All this is making many observers and investors wonder if Rite Aid is really worth $9.4 billion? After all the company’s stock was trading at $7.57 a share, on October 4, 2016.

To make matters worse its market capitalization was just $7.941 billion, less than what Walgreen is paying. Rite Aid also has assets of just $11.61 billion, which means Walgreen can potentially make some money by selling off its real estate.


The problem is that Rite Aid is not making that much money it reported a net income of just $135.34 million on $32.64 billion in revenue on August 31, $2016. There was also a negative cash flow of -$279.21 million and just $136.09 million in cash and short-term investments. Even Rite Aid’s cash from operations is questionable it was $668.7 million on August 31, 2016.

All this indicates a company with some very serious problems; which is why the management team decided to sell out to Walgreen. Rite Aid simply was not able to survive as an independent company. Like a lot of retailers it is being hit hard by food deflation and falling traffic.

Why Rite Aid Might be a Good Investment for Walgreen

Rite Aid’s appeal to Walgreen Boots Alliance can be summed up in just word: revenue. Walgreen gets an extra $32.64 billion in potential revenue; for an investment of just $9.14 billion, which sounds like a pretty good deal to me.

More importantly that revenue is growing dramatically because of the massive increases in prescription drug prices. Rite Aid’s revenues grew by $4.79 billion in the year that ended on August 31, 2016. Rite Aid reported $27.85 billion in revenues on August 31, 2015 and $32.64 billion a year later.


The revenue growth justifies the risk that WBA CEO Stefano Pessina took by entering into the Rite Aid deal. It also makes Walgreens a really growth and income stock because its management is willing to take the risks necessary to grow the company.

How long will the Walgreens-Rite Aid Deal Take?

My guess is that it will take several more months to complete the Walgreens-Rite Aid deal because of the trouble the company is having unloading all those stores. Walgreen may end up losing money on the sale to seal the deal, but future revenue will make up for those losses.

Completing the deal will put Walgreen in an excellent position to cash in on the continuing growth of prescription drug sales. The potential market for prescription drugs is vast and growing fast, there are 74.9 million Baby Boomers (people aged 51 to 59) in the US right now.

To add icing to the cake every single one of those Baby Boomers will be eligible for Medicare Part D (the prescription drug coverage) by 2031. Right behind them are 65 million generation Xers (persons aged 35 to 50). In an interesting twist, the first Generation Xers will be eligible for Medicare in 2031.

There is also an intriguing black swan that would be really good for Walgreens. Democratic Presidential candidate; and likely election winner, Hillary Clinton has proposed lowering the eligibility age for Medicare from 65 to 55. If that happens, Walgreens would have millions of new customers with government health insurance coverage.

This means Walgreen can afford to take its time with the RAD deal because the potential profits from it are enormous. Buying Rite Aid is a very smart move for Walgreen Boots Alliance, despite the problems with the FTC.