Analysts React To A Recut Walgreens-Rite Aid Deal

A revised merger deal from Walgreens Boots Alliance Inc WBA and Rite Aid Corporation RAD was largely due to regulatory concerns.

When the amended agreement was announced, there was little change in the shares of Walgreens, but Rite Aid shares plunged to a new 52-week low on concerns over completion of acquisition.

Height Securities believes the FTC will approve the deal and “approval could come between mid-February and the end of March, due to complications with the agency transition rather than underlying difficulties with the merger."

The revised deal suggests the negotiations are going on with regulators, who were asking for larger divestiture of stores to create a stronger potential number three competitor.

Meanwhile, Walgreens hasn't updated its guidance for 2017 EPS, the benefit from the Rite Aid acquisition, or the expected synergies from the transaction.

That said, Deutsche Bank’s George Hill outlined the impact of a bigger divestiture of stores. His estimates are as follows:

“The $2.00 to $2.50 reduction in the acquisition price results in a $2.1B - $2.65B lower acquisition price for WBA.”

“The lower debt we expect WBA to incur for the acquisition saves $100mm - $125mm / year in interest expense, or 7c - 8c in EPS.”

“The increased divestiture would result in a lower EBIT contribution from the acquisition of $27mm - $77mm, 2c – 5c negative to EPS.”

“We believe the net impact of the new deal could be 3c – 5c positive to EPS, but likely limited change in F2017 due to the extended merger close date.”

Hill has a Buy rating and $92 price target on Walgreens shares.

Image: Mike Mozart, Flickr