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Walgreens Rite Aid New Merger Terms Worse Off For Investors

The new deal terms add uncertainty:

1. Buyer does not show enough commitment for the deal to go through. Revising terms of a merger deal is always bad, especially when Rite Aid’s business did not deteriorate materially. Rite Aid had been effectively held as a hostage.

2. The revised terms indicated that FTC is not happy about the divestiture even after months of discussion, so even 1200 may not be enough and we are still not sure if FRED is going to be approved as the buyer. Regulatory uncertainty increased.

3. At $6.50, i believe a number of investors will prefer Rite Aid to go alone to continue its turnaround efforts or wait for a new buyer.

Before the revised terms, the deal will return about 28% in about 3 months (my estimates)

Now after the new facts, the deal will return at most 23% in 6 months ($7) or at worst 14% ($6.50).

The arbitrage returns diminished after the new facts and adds new uncertainties.

Below is Bloomberg article for alternative analysis:

Updated: February 1, 2017 — 2:27 pm

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