The following commentary was originally sent to Action Alerts PLUS subscribers on Oct. 26, 2015, at 3:54 p.m. ET.
According to a report from The Wall Street Journal, Walgreens Boots Alliance (WBA) is in advanced talks to acquire Rite Aid (RAD). A deal could be announced tomorrow, according to sources, which aligns with WBA's earnings report tomorrow before the open.
The news isn't particularly surprising as management (primarily CEO Stefano Pessina) has repeatedly expressed interest in scaling the business through M&A. Some had speculated that Alliance Boots would be the most compelling target as it would benefit from gaining the distribution business as well as increased scale via a step up in generic volume.
In our view, while a potential takeover of Rite Aid makes sense from a variety of operational standpoints -- increased scale, store count growth, potential synergies from generic procurement and potential for powerful margin expansion via store-level improvements -- we believe antitrust regulation is a huge risk.
If Walgreens was to go forth with the transaction, it would be at the mercy of FTC regulators who would undoubtedly require the company to divest a sizable amount of existing stores. In particular, Walgreens has significant overlap with Rite Aid in the Northeast, which would not only curtail potential accretion but add complexity to an already chaotic situation.