New Update Spurs Renewed Hope On Rite Aid-Walgreens Deal

Walgreens Boots Alliance Inc (NASDAQ: WBA) proposed acquisition of Rite Aid Corporation (NYSE: RAD) has hit several roadblocks since it was officially announced to investors in 2015.

M&A Update

The combination of the second largest drug chain with the third largest would essentially create the country's biggest drug chain.

The largest drug store chain currently is CVS Health Corp (NYSE: CVS).

Walgreens has been in talks with the Federal Trade Commission (FTC) since its announcement to discuss what actions need to be taken to gain the necessary regulatory blessings of its $17 billion acquisition.

Related Link: Walgreens Added To Credit Suisse Focus List

On Thursday, Walgreens said in an update it remains "actively engaged" with the FTC and reaffirmed its belief that the acquisition would be accretive to its earnings and realize synergies in excess of $1 billion.

Walgreens also said in its update that the "most likely outcome" would be the divestment of more than 500 stores than previously expected but still fewer than 1,000.

Finally, the company added it "continues to believe the acquisition will close in the second half of calendar 2016."

Deal Closure Closer?

In a research report on Thursday, Eric Coldwell of Baird suggested that Walgreens' update "signals positively" for the deal closure. The analyst also estimates the acquisition could yield approximately 4 percent accretion to its fiscal 2017 earnings per share and 9 percent or more to its fiscal 2018 earnings per share.

Coldwell added that Rite Aid was in the midst of a turnaround after coming close to bankruptcy in 2009. As such, Walgreens is looking to capitalize on the turnaround in progress and capture $1 billion in synergies through price harmonization, goods not for resale and back-office consolidation.

Outside of the Ride Aid acquisition, Walgreens is looking to generate $1.5 billion in cost savings by fiscal 2017 by closing underperforming stores, better managing corporate functions, pursuing opportunistic sale leasebacks and IT modernization. This is part of the company's plan to help close the U.S. retail pharmacy margin gap with the larger CVS.

Shares of Walgreens remain Outperform rated with an unchanged $95 price target.

At time of writing, Walgreens was seen trading at $83.18, down 1.76 percent. Rite Aid was down 0.18 percent at $8.17.

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