Short interest continues to spike in both Walgreens Boots Alliance and Rite Aid, even as the companies received government approval to move forward with the purchase of Rite Aid stores. S3 Partners real-time short interest analytics calculates the dollars at risk on the short side increasing $935 million to $1.8 billion since the end of Q2. The increase in dollars at risk is 99.2% and 156.7% respectively.
Despite the steadily rising levels of short interest and increased conviction by short sellers, there is plenty of stock available to borrow should they want to increase these bets. S3 estimates that only 2% and 13% of the float is being utilized. Both stocks continue to trade at general collateral levels, the cheapest fee or the easiest to borrow stocks. During this almost 3 month period, short sellers would have seen total profitability on their trades of $40 million (a 4.5% return).
Walgreens – Rite Aid deal:
Walgreens received antitrust approval to buy 1,932 stores from Rite Aid for $4.4 billion after almost two years of deal term amendments to overcome antitrust hurdles. The deal allows Rite Aid to hold onto 254 more stores than under the previous deal announced June 29th. The transaction makes Rite Aid a smaller, but stronger business, with lesser exposure to the pressures of unfavorable pharmacy reimbursement rates.
As for Walgreens, they should benefit from a significant expansion of its footprint, mostly in the Northeast and South. Once completed, Walgreens will become the nation’s largest chain drug retailer with roughly 10,100 U.S. drug stores, compared with 9,700 stores for No. 2 CVS Health. Walgreens expects to reach $300 million in annual synergies eventually.
Changing Chain Drug Sector:
The sector faces significant challenges from online heavyweights, Amazon and Walmart, which are coaxing customers to have more of their purchases delivered direct. According to Scott Mushkin an analyst from Wolfe Research, pharmacies will encounter two central areas of concern over the coming years; 1) He anticipates reimbursement pressures to continue, and 2) Amazon will likely enter the pharmaceutical dispensing business by 2020.
These significant headwinds facing Rite Aid and Walgreens are leaving bearish investors reason to question the rationality of this tie-up and perhaps the need for thousands and thousands of high-cost drug stores over time.
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Director, S3 Partners
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