Walgreens Move Is Best Given Circumstances

 Walgreens (WBA) has announced it will terminate its acquisition agreement with Rite Aid and instead purchase 2,186 stores (about half of Rite Aid’s fleet) from its retail pharmacy peer for $5.75 billion. The initial merger faced major pushback from the Federal Trade Commission and was headed for a lengthy legal battle. Walgreens chose to avoid a costly and time-consuming court action and buy as many stores as it could while avoiding further FTC action. While the firm did not acquire the total number of stores it had initially sought, this action will allow Walgreens to move on with a larger store count. Rite Aid will also participate in sourcing its remaining generic inventory through the Walgreens Boots Alliance Development, or WBAD, partnership, further adding volume to the lucrative joint venture, and allowing Walgreens to benefit from lower generic costs. Given the circumstances, we believe this was the correct course of action and think the firm will likely reap some value-creating synergies from the deal. However, we remain cautious regarding how successful the firm will be when it comes to integrating these assets into its own network, given the underinvested nature of the Rite Aid store assets. While we are still reviewing this transaction, we expect to moderately increase our $72 fair value estimate once we fully integrate this deal into our long-term modeling assumptions, and will keep our no-moat rating for Walgreens.

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