Shares of Rite Aid Corporation NYSE:RAD" rel="nofollow" >(NYSE:RAD) are trading higher today after an analyst speculated that Walgreen Company NYSE:WAG" rel="nofollow" >(NYSE:WAG) may be pursuing a possible merge with the company. Although there is no official confirmation, the analyst’s outspoken forecast sparked a buying frenzy on shares of Rite Aid.
Shares of Rite Aid were up as high as 9.6% today in the early morning trading to $2.06, the highest point their share price has seen since 2008.
Edward J. Kelly, analyst at Credit Suisse, says this merger makes a lot of sense strategically for both companies. The merger would create a new large drug store, which would be able to combat pharmacy benefit managers like Express Scripts. Walgreens and Express Scripts have had some bad blood in the past. Only recently, they were fighting over the reimbursement rate for the drugs sold under Express Scripts.
Cost cutting wise, it is believed that this Walgreen-Rite Aid merger would save anywhere from $400 million to $650 million. Kelly sees closing down stores and increasing cash reserves. The analyst also says that this would easily pass anti-trust laws.
Walgreens and Rite Aid would fill 30% of all prescriptions and 21% of all pharmacy counters. Also, a merger would have large market share for the new company such as 46% market share of New York City, LA 37%, etc. These would be huge cash cows for the new drug company and give it the ability to increase cash reserves and purchasing power.
However, here is where it gets tricky. Rite Aid shares could be worth as much as $4 share, which is double where the share price currently lies. Mr. Kelly says that Walgreens would have to increase the number of stores by 60% just to be able to contend.
This would be a major merger and certainly would carry a hefty price. Paying this heavy burden could cut Walgreen’s credit rating to near junk status.
The analyst ultimately concludes with “Ultimately, a deal could carry too much risk for a traditionally conservative Walgreens” (NYT). There you have it. Although the deal would be great it just simply costs too much. Walgreens would suffer long term with credit rating and sucking up cash reserves. Not to mention they would be taking on a lot of extra debt.
There are certain points that you need to look at a situation and say although this would be great for me, it will hurt me over the long run. Walgreens will still be able to prosper with or without Rite Aid.