Walgreens the clear winner of terminated Rite Aid deal


Earnings reports don't get much bigger than the fiscal third-quarter report that Walgreens Boots Alliance (ticker: WBA) issued Thursday. In addition to typical market-moving information such as earnings, revenue and guidance, Walgreens finally closed the book on its two-year pursuit of Rite Aid Corp. (RAD).

Walgreens reported third-quarter adjusted diluted earnings per share of $1.33 on revenue of $30.1 billion. While both numbers topped consensus Wall Street expectations of $1.30 and $29.75, respectively, the big news for investors was the termination of the Rite Aid buyout.

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After nearly two years of butting heads with antitrust regulators over a full buyout of Rite Aid, Walgreens agreed to a new deal to acquire 2,186 Rite Aid stores for $5.175 billion.

"We believe this new transaction addresses competitive concerns previously raised with respect to the prior transaction," Walgreens CEO Stefano Pessina says.

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Investors certainly viewed the earnings beat and modified deal as a big win for Walgreens. Its shares surged more than 3 percent in early Thursday trading, while Rite Aid stock tumbled 23 percent.

The Walgreens-Rite Aid saga began Oct. 27, 2015, when Walgreens agreed to purchase Rite Aid for $17.2 billion, or $9 per share. The deal faced intense regulatory scrutiny from the beginning, requiring Walgreens to pursue aggressive asset divestment.

Shares of Fred's (FRED) skyrocketed 81 percent in December when the company announced it would be acquiring 865 Rite Aid stores as part of Walgreen's divestment plan. Fred's shares fell 26 percent Thursday after the termination of the Walgreens buyout also nullified the Fred's deal.

Walgreens will pay Fred's $25 million in cash as reimbursement for expenses related to the deal. Walgreens also owes Rite Aid a $325 million termination fee.

Looking ahead, Walgreens is the clear winner from the ordeal. Management says it expects its new deal with Rite Aid to close within six months.

Walgreens is also returning a significant portion of the money it saved from the original buyout deal to its shareholders. On Thursday, Walgreens authorized a new $5 billion stock buyback program.

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Furthermore, the company issued strong full-year earnings guidance now that the Rite Aid deal is settled. Walgreens expects full-year EPS to fall to the $4.98 to $5.08 rage, topping consensus Wall Street estimates of $4.96.

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