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Evercore's Take On The Walgreens-Rite Aid Merger Amendment

RADCQ, WBA | January 31, 2017

Evercore ISI maintained its Buy rating on Walgreens Boots Alliance Inc (NASDAQ: WBA) saying there is still chance of a reasonable outcome for both parties, despite the amendment to the merger, due to a material drop in the EBITDA/financial conditions of Rite Aid Corporation (NYSE: RAD).

The companies amended and extended the termination date to July 31 from January 27. The amendment also cuts the purchase price paid to Rite Aid to $6.50-$7.00 per share in cash versus $9.00 per share in the initial agreement.

The final share price will be determined by the number of store divestitures required, with the price of $7.00 for 1,000 or fewer divested stores and $6.50 if 1,200 stores are divested. The price will be pro-rated if an intermediate number is divested.

The amendment implies the recently announced plans to sell 865 Rite Aid stores to Fred's, Inc. (NASDAQ: FRED) were not enough to address potential antitrust concerns. Evercore still expects deal break price to be between $3.00 to $3.50.

“On the WBA front, shareholders will be quite content to pursue this transaction (cost rationalization / de-leveraging exercise) despite the elevated divestiture count with accretion / PF leverage likely biased positively given the >20% haircut to deal value,” analyst Ross Muken wrote in a note.

Muken noted that the approval extension to end of July delays Walgreens ability to start materially inflecting EPS power.

The analyst also pointed out there is uncertainty over who will buy the incremental stores as he is skeptical whether Fred’s has the financial capacity to buy these stores despite the original deal has a provision to do so.

“Note, if a second buyer is required, this could likely result in the timing of the transaction to be biased toward the end agreement date vs. more near-to-medium-term,” Muken added.

Muken has an Buy rating on Walgreens, with a price target of $93.