Walgreens (WBA)/Rite Aid (RAD) Divested Stores Will Likely Go to Strategic Buyers, Says Deutsche Bank

November 9, 2016 9:54 AM EST
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Deutsche Bank maintained a Buy rating on Walgreens Boosts Alliance (NASDAQ: WBA) with a price target of $88. Analyst George Hill thinks most Rite Aid (NYSE: RAD) divested stores will go to strategic buyers.

"We recently caught up with several private equity execs with experience in retail to get their thoughts on the WBA/RAD deal, and PE’s potential role in the process given the news reports. For a deal like this, PE is a buyer of last resort, because both regulators and strategics would prefer to see the stores sold to established competitors. PE buyers would negotiate for very low prices given the challenges of running a small pharmacy business and the investment needed in systems and management. These conversations supported our belief that most of the divested stores will go to strategic buyers. We continue to expect the deal to be completed and maintain our Buy rating on WBA shares," said Hill.

"Having said that, strategics are the last buyers WBA wants to sell stores to, as they will have the most negotiating power and will be the most competitive. The FTC would likely prefer to see the stores sold to a strong competitor in each market to maintain the same level of competition as before the RAD acquisition, which makes them the preferred buyers but also gives them negotiating prowess. These buyers will demand that WBA give up more attractive locations (even current Walgreens locations). While WBA would command a higher price from a strategic acquirer compared to private equity, the strategic buyer would be a stronger competitor after the deal closes," added the analyst.

For an analyst ratings summary and ratings history on Walgreens Boosts Alliance click here. For more ratings news on Walgreens Boosts Alliance click here.

Shares of Walgreens Boosts Alliance closed at $80.09 yesterday.



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