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Walgreens Boots Alliance Inc: The Rite Aid Marriage Looks Great (WBA)

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Walgreens Boots Alliance Inc (NASDAQ: WBA ) reported fourth-quarter earnings on Thursday before the bell. And while W BA stock was up in response, it likely wasn't the results that did it.

Walgreens Boots Alliance Inc: The Rite Aid Marriage Looks Great (WBA)

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Analysts were expecting earnings of 99 cents per share on revenues of $29.06 billion. Walgreens missed on the top line with $28.6 billion but delivered solid profits with $1.07 billion.

Therefore, earnings were "mixed" as its U.S. Pharmacy business continues to thrive, but the company's performance is weighed down by the acquired Alliance Boots assets. Walgreens' Wholesale revenue fell 6% whereas, international pharmacy revenue dropped another 11%.

No, the result was solid, and WBA stock was up, because Walgreens addressed one pivotal thing:

The Rite Aid Corporation (NYSE: RAD ) merger.

What about RAD?

The big question surrounding Walgreens earnings was what the company would say about its merger with Rite Aid.

The day before Walgreens' earnings the New York Post reported that The Kroger Co (NYSE: KR ) may not proceed to acquire the 650 stores that Walgreens must divest to acquire Rite Aid. Kroger is largely considered by most analysts as the favorite to acquire these stores because of its acquisitive nature and desire to grow market share.

Beyond the store divestment issue, there have been rumors that the FTC is concerned about Walgreens' growing pharmacy benefit management business and what it could gain with the acquisition of Rite Aid. Walgreens not only has its own PBM business, but partnered with the fourth-largest PBM in Prime Therapeutics earlier this year.

This partnership, coupled with Rite Aid's EnvisionRX business, would make Walgreens a PBM powerhouse with significant leverage over drug companies when it comes to pricing.

Still, Walgreens has nowhere near the PBM leverage of Express Scripts Holding Company (NASDAQ: ESRX ) or CVS Health Corp (NYSE: CVS ), which made arguments against a Rite Aid merger for PBM-related issues seem unrealistic.

With that said, Rite Aid was a big topic for WBA ahead of the quarter, with investors realizing the uncertainty that surrounds the merger.

As a result, Walgreens and Rite Aid extended their merger agreement from Oct. 27 to Jan. 27, with WBA saying that it now expects to close the merger early next year.

And to show its confidence, Walgreens provided fiscal 2017 guidance with 5 to 12 cents of share accretion from Rite Aid.

WBA and RAD Move Higher … Together

All things considered, both WBA and RAD stock moved significantly higher following the report and comments from Walgreens management. Walgreens stock jumped nearly 4%, and Rite Aid stock jumped more than 5.5% in early market trading.

Given that the report was mixed, it is clear that what's pushing shares of both Walgreens and Rite Aid higher is renewed confidence that the merger gets done. WBA has fallen double digits over the last year, whereas RAD is still trading a near 30% off Walgreens's buyout price.

Overall, RAD stock looks like a terrific merger arbitrage investment opportunity because of its big discount coupled with the likelihood that Walgreens gets those 1,000 stores divested and the deal closed soon.

Remember: Walgreens had previously said it would divest up to 1,000 stores, and by all accounts, the magic number of divestments is far below 1,000 stores.

In other words, RAD looks like a good buy, especially with sentiment seeming to shift regarding the merger's likelihood to complete.

As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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