March 14, 2012 at 16:42 PM EDT
Rite Aid Surges 9% to $2, Would Walgreen Pay Double?
Mounting speculation that Walgreen could be interested in buying Rite Aid sent the latter’s stock soaring Wednesday. Shares of Rite Aid (RAD) rose 17 cents, or 9%, to $2.05, a new 52-week high. Rite Aid, whose market capitalization is now about $1.8 billion, could fetch between $2 and $4 per share in a takeover, according [...]

Mounting speculation that Walgreen could be interested in buying Rite Aid sent the latter’s stock soaring Wednesday.

Shares of Rite Aid (RAD) rose 17 cents, or 9%, to $2.05, a new 52-week high.

Rite Aid, whose market capitalization is now about $1.8 billion, could fetch between $2 and $4 per share in a takeover, according to a report issued Wednesday by Credit Suisse. Rite Aid stock is up 81% over the past year, but its multi-year chart is not pretty.

Walgreen (WAG) shares rose fractionally. The stock, which closed Wednesday at $33.38, is down about 20% over the past 12 months, though it pays a 2.7% yield. Based in suburban Chicago, Walgreen fills about 21% of U.S. retail prescriptions, and the combined with Rite Aid, would account for30% of prescriptions and 21% of U.S. pharmacy counters.

One reason Walgreen could be in the market for an acquisition – say $3 to $4 billion plus debt: it needs a new source of revenue, and it could squeeze out cost efficiencies from Rite Aid. Walgreen was unable to finesse a new contract in 2011 with pharmacy benefit manager Express Scripts (ESRX), which is merging Medco Health Systems (MHS). Walgreen hasn’t been filling prescriptions for Express Scripts customers and sales are hurting.

The merger was supposed to close this week, but that’s been extended to “early in the second quarter,” according to a Zachs Equity Research note.

The risks are major, writes Credit Suisse Analyst Ed Kelley:

  1. Walgreen would increase its store base by 60%.
  2. Credit downgrades would result unless Walgreen pays for the deal with stock.
  3. Labor negotiations: 30% of Rite Aid employees are unionized.
  4. “Rite Aid has many sub-par locations and most stores need a large capital injection.”

Credit Suisse estimates Rite Aid could add to Walgreen earnings – 30 cents to 40 cents including cost synergies and the presumption that Walgreen can refinance Rite Aid debt at lower rates. The estimates, however, exclude excluding revenue synergies and integration costs.

Stock Market XML and JSON Data API provided by FinancialContent Services, Inc.
Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes.
Markets are closed on certain holidays. Stock Market Holiday List
By accessing this page, you agree to the following
Privacy Policy and Terms and Conditions.
Press Release Service provided by PRConnect.
Stock quotes supplied by Six Financial
Postage Rates Bots go here