Brian Sozzi Out With Note On Retail M&A (FRED, ARO, AE, CVS, WAG)

Brian Sozzi of Wall Street Strategies is out with a research note discussing his latest potential idea for a retail company to go private. In the note, Sozzi picks Fred's, Inc. FRED as his idea to most likely go public. There has been the continuous rumors that private-equity might bid for American Eagle AEO or Aeropostale's ARO, but Sozzi mentions the lesser-known Fred's, which operates stores in 15 states, and Sozzi believes could be an addition for Walgreen WAG or CVS Caremark CVS. In the note, Sozzi says, "I have long compared the company to dollar stores Family Dollar FDO and Dollar Tree DLTR when constructing peer comparables, knowing full well the business model of Fred's was slightly different. At this point in time, I think Fred's is better served being valued on a relative perspective to Walgreen and CVS Caremark CVS seeing as 46% of its store base operates pharmacies (a competitive advantage to dollar stores) and an increasing amount of merchandise is priced nowhere near a dollar." Sozzi mentions the two pharmacy benefit companies as potential acquirers because of a few reasons. 83% of Fred's stores are in smaller cities (less than 15,000), it's been acquiring independent pharmacy customer lists, and it boasts competitive advantages, two of which he says are the company's pharmacy operations and tobacco sales. Here is the entire research note from Sozzi discussing this trade. Disclosure: no position in names mentioned.