It’s not a deal that’s known to be under active consideration by either party. But when you look at these two different retailers, Walmart WMT +0.7% and Walgreens belong together now. The transaction makes more sense now than ever because of trends, like in grocery retailing, that the coronavirus shutdown has set into motion. Here’s why this deal makes sense now:
On Day One, The Shareholders Are Richer
Using very conservative assumptions, namely, that there is no financial synergy between the two companies, that Walgreens is acquired for stock and Walmart pays a premium of 25% (using yesterday’s closing price of $40.46), then the earnings per share of Walmart will be higher by 11.9% on the day of the closing (see chart below). That should cause an immediate increase in the value of Walmart stock for any investor driven by multiples of earnings. Ergo, on the day the deal is announced, Walmart stock should rise as soon as investors understand the immediate benefit to Walmart shareholders, making Walmart shareholders immediately more wealthy.
It’s Not Just Financial Engineering, The Fundamentals Are Real
The value of combining these two retailers isn’t just about a higher stock price on on the day a transaction is completed. There are many ways to for the combined company to make more money than the two companies could separately, both in the short-term and the long-term.
One of the key reasons for Walmart’s overall success is its efficiency, which relates to Walgreens in two ways. One is buying power. Because of Walmart’s size, it can get better deals on consumer packaged goods than almost anyone. Bringing that scale to Walgreens for products that overlap, which are numerous, will increase Walgreens’ buying power and its profitability.
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Source: Forbes