Wednesday, February 21, 2018 12:27:46 AM
Is Rite Aid Corporation Stock Being Bought Out at $6 or $2.50?
The actual takeover price for RAD stock is more like $2.50
By LUKE LANGO, InvestorPlace Contributor http://bit.ly/2GtG2Hy
Well, the suitor wasn’t Amazon.com, Inc. (NASDAQ:AMZN) as many expected, but struggling pharmacy chain Rite Aid Corporation (NYSE:RAD) has finally agreed to merge with privately owned Albertson’S LLC in a deal that will allow Albertson’s to go public.
Is Rite Aid Corporation Stock Being Bought Out at $6 or $2.50?
RAD stock jumped on the news. It was up as much as 30% in premarket trading.
But the stock has cooled down since because no one can really understand how much each RAD shareholder gets as a result of this merger. As opposed to listing an exact takeover price, the merger press release is pretty vague and forces investors to do some math of their own. Here’s the wording from their PR:
Under the terms of the agreement, in exchange for every 10 shares of Rite Aid common stock, Rite Aid shareholders will have the right to elect to receive either (i) one share of Albertsons Companies common stock plus approximately $1.83 in cash or (ii) 1.079 shares of Albertsons Companies stock.
The companies also added that the combined Albertson’s company would have a value of $24 billion, including debt, and that the fully diluted share count would be 392.9 million.
So how much does each RAD shareholder get? By my math, it works out to roughly $2.50 per share. Here’s why.
Is It $6 or $2.50?
When RAD stock skyrocketed 30% higher in premarket trading, it looks like that was the result of overly bullish investors doing some math wrong on this deal. And its easy to see how they were confused. The wrong math for this deal is as follows.
The combined value of the new Albertson’s company is $24 billion. On 392.9 million shares out, that is more than $60 per share. Each 10 shares of RAD stock is worth $1.83 plus that $60, so about $62. The means 1 share of RAD stock is equal to just over $6.
But this back-of-envelope math is wrong because it misses a critical component: debt. The combined value of the new Albertson’s company is $24 billion, including debt.
And both companies have a lot of debt.
According to recent filings, RAD has right around $3 billion in debt while Albertson’s has somewhere close to $12 billion in debt. Combined, that is $15 billion in total debt. Take that $15 billion out of the $24 billion total value, and you get to a market cap of $9 billion. On 392.9 million shares outstanding, that is roughly $23 per share.
In this sense, each 10 shares of RAD stock is actually worth $1.83 plus $23 (not $60), so the total value of 10 shares of RAD stock is roughly $25 (not $62). That means 1 share of RAD stock is worth $2.50.
This math also checks out a different way.
The two competing offers are either 10 shares of RAD stock for one share of Albertson’s plus $1.83 in cash per share, or 10 shares of RAD stock for 1.079 shares of Albertson’s. Because both equal 10 shares of RAD stock, then one share of Albertson’s plus $1.83 in cash per share equals 1.079 shares of Albertson’s stock. The math, then, is as follows:
10 shares RAD = 1 share Albertson’s + $1.83
10 shares RAD = 1.079 shares Albertson’s
1 share Albertson’s + $1.83 = 1.079 shares Albertson’s
$1.83 = 0.079 shares Albertson’s
1 share Albertson’s = ~$23
10 shares RAD = 1 share Albertson’s + $1.83 = ~$23 + $1.83 = ~$25
1 share RAD = $25 / 10 = $2.50
Bottom Line on RAD Stock
This isn’t the big deal that RAD shareholders, myself included, were looking for. I realistically thought this stock would be at $5 and up over the next several months.
Nonetheless, $2.50 is 25% higher than where the stock has languished for the past several months (~$2). Moreover, the current price on RAD stock is $2.15 as of this writing, so that implies there is still healthy upside to the actual takeover price.
All in all, I remain long RAD stock until it gets close to its actual takeover value of roughly $2.50 per share.
As of this writing, Luke Lango was long RAD and AMZN.
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