The merger between Rite Aid Corp. (RAD, Financial) and Walgreens Boots Alliance Inc. (WBA, Financial) disintegrated over the last six months, with the deal finally being called off in June. The company remains open and operating. Rite Aid still plans to sell 2,186 stores - about half of its locations - to Walgreens for $5.2 billion, using those proceeds in addition to the $325 million termination fee to pay down $7 billion in debt that has been crushing the balance sheet for years.
The company will still generate well over $15 billion in sales, likely at better margins, by focusing on key East and West coast locations, with a large presence in California (577 stores) and Pennsylvania (535 stores) to build upon. When news of that deal closing hits the wire, the stock will have a momentary spike, yet longer term is where my focus remains.
Rite Aid will really need to do a good job of getting profit margins up and reign in capital spending, which makes the sale of roughly half its stores to Walgreens even more important.
David Einhorn (Trades, Portfolio)’s position seems massive at 16.78 million shares, but that is less than 1% of his total assets managed and just 1.59% of Rite Aid's outstanding stock. If you do follow along and buy, it would be best to stick with a similar weighting. He owned the stock in 2013-14 and made close to 200% on the trade, but this time around he is down. He first bought in at $7.49, then added at $7.69 and $8.24, and just recently reducing at $4.25.
Mario Gabelli (Trades, Portfolio) and Leucadia National (Trades, Portfolio) also own shares of Rite Aid.
If you do not want to buy the stock, another way to trade it is by owning January 2018 call options. The $4 strike is selling for a dime, and if Einhorn and bullish traders are right about Rite Aid, that could be good for five times to 10 times. Want something more short term? The August 2018 calls at the $3 strike are a nickel.
Of course, I think once Rite Aid cleans up its balance sheet and refocuses its efforts to build shareholder value again, they will be private equity sharks in the water, ready to pay a little premium, load up the balance sheet with debt and flip it back to the public in two to four years. Again, a 1.5% stake or options are good ways to trade this stock. It is not a long-term buy and hold.
Disclosure: I am long RAD.
