Fred's Market Cap Goes From $450 Million To $1.3 Billion On 865 Walgreen's, Rite Aid Stores Acquisition

Fred's, Inc. FRED shares jumpstarted to $20.19 on Tuesday from Monday's closing value of $11.15. The strong upward move came on the back of an announcement that Fred's would buy 865 stores and certain assets related to store operations located across the eastern and western United States from Walgreens Boots Alliance Inc WBA and Rite Aid Corporation RAD for $950 million in cash. The company expects the deal to close in the first half of 2017.

Transitioning To Bona Fide Pharmacy

Following the development, Deutsche Bank said in a note released on Tuesday that the company has taken a giant leap in its transformation from a dollar store to a bona fide pharmacy. The firm noted that the company is poised to become a long-term viable competitor in the space with a more national footprint.

Risk/Reward Balanced

While viewing the deal value as favorable, analyst Paul Trussell said the markets have now folded the value into the current stock price. The analyst views the risk/reward as balanced, as it expects material projected accretion and cash flow as well as the benefits of greater scale and the TSA versus integration and execution challenges, plus lingering industry issues in both pharmacy and the front-end.

Remaining On The Sidelines

Deutsche Bank also raised questions regarding procurement and merchandising, bannering over the longer term, the geographic mix of the new footprint and potential DC needs, capital allocation and whether the new management team can effectively operate 1,500 stores despite struggles with the current base. The firm said it would remain on the sidelines, awaiting clarity on these issues.

Raising Estimate, Price Target

Factoring in the new store additions at the end of the second quarter, the firm raised its 2017 earnings per share estimate to $1 from -$0.12. The firm also raised its price target to $23 from $8 following Tuesday's run up. The firm has a Hold rating on Fred's.

In pre-market trading, shares of Fred's were pulling back 0.99 percent to $20.19.

Image Credit: By Michael Rivera (Own work) [CC BY-SA 3.0], via Wikimedia Commons