Walgreens Is Optimistic About Acquisition, Despite Business-Unfriendly FTC
The last 18 months have shown us a rough regulatory environment for mergers and acquisitions. Big Government and Big Business have butted heads, shutting down several high-profile purchases.
In May, the Federal Trade Commission (FTC) finally called a halt to Staples' (SPLS) purchase of Office Depot (ODP) - Get Report , despite the fact that the acquisition would have been the best possible solution for both companies' business woes, as well as their ailing stocks. And roadblocks from the FTC recently caused oilfield solutions giants Halliburton (HAL) - Get Report and Baker Hughes (BHI) to call off their proposed merger. That deal, if successful, would have been worth a whopping $28 billion.
Mergers are failing at all-too rapid a pace, and this makes investing in M&A targets a risky speculation.
That's why some investors today are skeptical over the proposed purchase of pharmacy chain Rite Aid (RAD) - Get Report by rival Walgreens Boots Alliance (WBA) - Get Report , despite optimistic statements from Walgreens' CEO.
Last year, drug store behemoth Walgreens announced its intentions to make a bid for Rite Aid, a much smaller company, for $9.4 billion. To please the FTC and facilitate regulatory approval, Walgreens planned on closing as many as 1,000 locations.
Unless a divestiture were to happen, the two companies combined would operate more than 12,500 stores. Their next biggest rival, CVS Health (CVS) - Get Report , since its acquisition of Target's (TGT) - Get Report pharmacy wing, owns more than 7,000 locations. This would make the pharmacy playing field a bit too narrow for the FTC's taste.
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However, this week, Walgreens CEO Stefano Pessina has reassured investors that the number of stores to be shed is actually much lower -- only 500. And he also believes that the deal will pass regulators and be completed by the end of 2016. "Time-wise, we still believe that we will be able to finish the deal by the end of the calendar year," he said.
Rite Aid stock was up 2% on the news. But Walgreens was down about 3%.
It's tempting to grab shares of Walgreens now, as prices dip lower. After all, the company recently reported decent earnings for the most recent quarter. However, the company has lots of exposure to the U.K. markets thanks to its purchase of ubiquitous British pharmacy chain Boots in 2014. About economic uncertainty in the U.K. following the Brexit vote, Pessina warned investors, "The situation is very volatile at this time. For sure, the period of uncertainty will be quite long."
If you want to score some Walgreens shares at this week's low prices, be prepared to hold for the long term. A depressed pound and rotten consumer sentiment across the pond could drag the company's revenues down for the time being.
Plus, there's every likelihood the FTC will nix the planned acquisition of Rite Aid. This stock could end up becoming quite rotten indeed. Unless you're up for a long-term gamble, don't be too tempted by Walgreens today.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.