Rite Aid (NYSE: RAD) plunged and spun into freefall on Jun 29 after Walgreen Boots Alliance (NASDAQ: WBA) announced it would replace its previous merger agreement.
Walgreen will acquire around $5.2 billion worth of assets and 2,186 Rite Aid stores. The deal skips any need for shareholder approval but still requires the FTC’s review. Should the deal fall apart, Rite Aid gets $325 million from a termination fee.
Rite Aid is effectively selling its assets and terminating the merger agreement. Management may have concluded it would not likely get an approval from the FTC. Instead of fighting in court to get the deal through, Rite Aid decided that shedding assets would ensure its long-term survival. It is keeping stores in the west coast but selling most stores acquired from the Eckerd deal (in 2006).
Fred’s (NASDAQ: FRED) could buy Rite Aid’s remaining store or form a merger agreement. The latter scenario of a merger is more likely, since Fred may not have the financing to buy around 2,000 of Rite Aid stores.
Takeaway
The risk of bankruptcy for Rite Aid in the near term is now off the table. The company gets a breakup fee from the new deal. After Walgreen acquires the stores, Rite Aid will have fewer stores to run and has more strategic options as a smaller company that includes a merger.