Walgreens Boots Alliance, Inc. (NASDAQ:WBA) announced its fourth-quarter results on Wednesday and beat on both earnings and revenue by $0.07 and $70.0 million, respectively. And yet the WBA stock is down over seven percent the same day. Prospective Walgreens stock investors are confused as to what really happened.
Apparently, Walgreens has decided to do away with its previously planned stock repurchase program in order to prepare for Rite Aid Corporation’s (NYSE:RAD) acquisition next year. The rumors of the acquisition started making rounds on Tuesday and pushed RAD stock’s price up by 40%. But Wednesday morning has seen a similar sell-off in RAD stock. The reason being that RAD stockholders were expecting a price of $10.00 or more, while Walgreens decided to offer a price of $9.00 apiece.
Is Walgreens’ Acquisition of Rite Aid a Good Idea?
Walgreens’ acquisition of Rite Aid will result in the birth of one of the biggest pharmacy and drugstore giants in the world. Walgreens has been on an acquisition rampage, with acquisition of Boots Alliance, the biggest drugstore chain in the U.K., less than a year ago and now the acquisition of the third-largest drugstore in the U.S., Rite Aid Corporation.
The move could spark a government scrutiny under antitrust laws and may drive Walgreens to divest some stores. Should the acquisition go ahead, Walgreens would still turn up victorious in the end, as it is poised to make over a billion dollars in synergies alone.
Both Rite Aid and Walgreens have been closing stores lately in order to align costs with revenues. A likely divesture would close down some more stores. But what will emerge is a bigger, stronger, leaner drugstore company that will ultimately lead the pharmacy sector in the U.S. healthcare industry. The next big competitor that will remain in the market is CVS Health Corporation (NYSE:CVS).
Walgreens is going to finance the Rite Aid acquisition of $17.2 billion in part by debt. The only big challenge posed to Walgreens from this deal is the consolidation of Rite Aid’s hefty long-term debt, which stands at over $5.5 billion as opposed to Walgreen’s little under $4.0 billion. However, its strong cash position offsets some of my debt-related concerns.
The consolidation of the two companies will increase Walgreens’ store footprint across the country and also add Rite Aid’s RediClinics and its cosmetics, beauty, and wellness sections to its portfolio.
The Bottom Line on WBA Stock
I strongly feel that Wednesday’s sell-off in Walgreens stock is unwarranted. Walgreens has consistently stepped up its dividends over the years and is in a position to continue the trend. WBA stockholders can sleep soundly on their investment because even if the stock doesn’t return much in capital gains (which is unlikely), it will still be a great dividend play for consistent returns in the current low interest rate environment.
The deal is expected to close by the second half of next year so WBA stockholders will need to have a little patience before they start seeing the fruit of the deal. The company is already delivering promising growth numbers on revenues and earnings.
The best move will be to hold off on entering into a position on RAD stock and instead consider WBA stock on the recent dip.