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Rite Aid may be viable acquisition, analyst says

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BASEL, Switzerland Walgreens' acquisition of Duane Reade on Wednesday may make Rite Aid a more attractive acquisition target, speculated UBS analyst Neil Currie in a research note issued Thursday.

Currie has rated Rite Aid a “buy,” which is unchanged from before Walgreens’ announcement yesterday, and has a 12-month price target of $4 for Rite Aid’s stock. Rite Aid was trading at around $1.50 early Thursday morning after having closed at $1.39 at end-of-day Wednesday.

Walmart may be one of the more likely suitors, Currie suggested, especially given the mass merchant’s potential urban and pharmacy business aspirations.

Currie also identified both Walgreens and CVS as possible suitors despite the fact that either of these chains might have to make significant divestitures to satisfy the Federal Trade Commission.

“We believe potential suitors for stores within the Rite Aid portfolio could include CVS, especially in the Pacific Northwest and Mountain regions; Walgreens in certain urban markets; and Walmart, given our view that Walmart has significant potential to grow in urban markets, is looking more closely at the economics of a smaller food/drug footprint and appears to have wider healthcare ambitions,” Currie wrote.

Based on evaluations of Walgreens' acquisition of Duane Reade and CVS’ acquisition of Long’s Drug in 2008, the possible price-tag for a Rite Aid acquisition could ring as high as $7.7 billion.

Currie calculated that Duane Reade is selling at an enterprise value/store of $4.2 million, which compares with the $5.6 million paid for Long’s Drug by CVS in 2008. EV/store is a measure of a company’s value, often is calculated as market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents and divided by the store base.

Meanwhile, Rite Aid’s EV/store is calculated at approximately $1.6 million, Currie noted, given that Rite Aid’s salers/store is lower by 22%, versus Duane Reade and half of Long’s (in 2008). Multiply that $1.6 million/store evaluation by the approximate 4,800-strong Rite Aid store base and the likely cost for Rite Aid will calculate to about $7.7 billion.

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