Partisan Politics May Be To Blame For Hold Up In Walgreens-Rite Aid Deal

Partisan politics may be holding up the impending M&A deal between Walgreens Boots Alliance Inc (NASDAQ: WBA) and Rite Aid Corporation (NYSE: RAD), Deutsche Bank said in a note earlier this week.

Walgreens may try to force a Federal Trade Commission decision on the deal within 30 days, analysts George Hill and Stephen Hagan said. Why does this matter? The traditionally five-member FTC board has three vacant seats.

The commissioner, a Democrat, may oppose the deal, and the chairperson, a Republican, is unlikely to vote against the deal, the analysts said.

Deutsche highlighted reports that suggested Walgreens could certify it has complied with the second request and force short-staffed FTC to make a decision. Media reports indicate the regulatory agency still has issues with the deal and with Fred's, Inc. (NASDAQ: FRED) as a buyer, Deutsche Bank said.

See Also: A Positive View On Walgreens Doesn't Depend On Rite Aid Deal

Downside If Deal Fails

Deutsche Bank feels the downside to Walgreens is in the range of $73-$79 if the deal fails to close. This range, according to the firm, represents 14 to 15 times its calendar year 2017 earnings per share estimate of $5.24. Additionally, the firm said the range represents the current pharma services average to a one-turn premium, which the analysts feel is justifiable, given Walgreens' positive operating leverage and capital deployment flexibility, excluding a deal for Rite Aid.

If the deal falls through, Rite Aid shares could drop from $4.71 to $2.25, the firm said. The $2.25 stock price estimate is based on an EV/EBITDA multiple of eight times its calendar year 2017 estimates, with the multiple representing a "slight discount" from where Walgreens and CVS Health Corp (NYSE: CVS) trade. This multiple, Deutsche Bank said, is fair for a subscale player in the competitive retail pharmacy space.

Deutsche Bank has a Buy rating on Walgreens with a $92 price target.

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