Walgreens-Rite Aid Synergies May Be Better Than Expected, Says Analyst

• Walgreens Boots Alliance Inc (NASDAQ: WBA) shares have gained 10 percent in the past six months, amid high volatility.
• Cowen & Co’s Charles Rhyee maintained an Outperform rating on the company, with a price target of $102.
• The acquisition of Rite Aid Corporation (NYSE: RAD) could add synergies of more than $1 billion, Rhyee mentioned.

Walgreens has entered into an agreement to acquire Rite Aid for $9 per share, which values the latter at about $17.2 billion. Analyst Charles Rhyee said that the purchase price is marginally lower than Cowen’s expectation of $10 per share.

Walgreens expects the acquisition to close in 2H16, subject to approval by Rite Aid’s shareholders and the FTC. Management expects the transaction to be accretive in its first full year after closing and projected synergies of more than $1 billion.

Rhyee commented, “In our updated analysis, we assume synergies of $1B and that WBA will fund the acquisition with $2B of cash on hand with the remainder with new debt at 3% interest… Our revised accretion analysis suggests the deal is 20% accretive to WBA's CY16 EPS before divestitures.”

Walgreens may have to divest some stores following the acquisitions. The most overlap between the two companies is in the Northeast, where eight states have more than 25 percent concentration.

Rhyee believes that Walgreens would record better-than-expected merger synergies and cost reductions, and also generate gross margin expansion from front-end mix. The company could raise its FY16 guidance from the current $4.25-$4.60 range when it reports results on October 28.