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Walgreens Boots Alliance Inc (WBA): Do Hedge Funds Dislike the Rite Aid Corporation (RAD) Merger?

Reputable billionaire investors such as Nelson Peltz and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets is required to invest in a hedge fund and most successful hedge funds won’t accept your savings unless you commit at least $5 million) by pinpointing winning stocks. However, if you’re not wealthy, hedge funds and other big asset managers can still do the due diligence and analysis for you, through their highly-skilled research teams and vast resources. All you have to do is track their filings to see the latest moves made by these skilled investors, which is exactly what we do at Insider Monkey. With that in mind, let’s look at the latest hedge fund activity in Walgreens Boots Alliance Inc (NASDAQ:WBA) and see how the stock has been traded lately.

Walgreens Boots Alliance Inc (NASDAQ:WBA) was in the portfolios of 78 of the hedge funds in our database at the end of the fourth quarter of 2015. WBA saw a sizable decrease in activity from these elite hedge funds in the fourth quarter, as there were 91 hedge funds in our database with WBA holdings at the beginning of the period. The value of these investor’s holdings also fell heavily during the quarter, by about 27% to $6.9 billion, despite the stock posting gains of over 2% during the quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as China Life Insurance Company Ltd. (ADR) (NYSE:LFC), Starbucks Corporation (NASDAQ:SBUX), and Kraft Heinz Co (NASDAQ:KHC) to gather more data points.

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The decline in smart money ownership is particularly interesting given the big news during the fourth quarter, that Walgreens Boots Alliance will acquire Rite Aid Corporation (NYSE:RAD) for $17.2 billion in a deal which the company expects to be accretive in the first full year and to yield as much as $1 billion in synergies. Stocks involved in mergers usually become more popular, as event-driven funds make plays on them, yet WBA sank in ownership, while Rite Aid was flat (up by one fund to 47) during the quarter. Do WBA investors feel the price tag is too steep or that the deal itself is not a good fit?

Barry Rosenstein of JANA Partners does not appear to be of that mindset, saying this about the merger, which is currently facing regulatory scrutiny, in his third quarter letter to investors:

“In late breaking news, Walgreens announced this week plans to acquire Rite Aid Corp. (RAD) for $9 per share in cash. We view this acquisition positively. The commercial logic is sound as it will strengthen WBA’s position in the changing healthcare delivery market by giving the company increased scale, and it will enable WBA management to improve the earnings of the Rite Aid store base by applying the same practices honed at Boots – and being applied to Walgreens stores – to enhance the retail experience and improve the front end performance. The financial metrics are attractive; management has identified $1 billion of synergies. Stefano Pessina and his team have been at the helm for less than a year. The new team has exceeded the financial commitments made to shareholders and is now doing what they have so successfully done throughout Stefano’s long career – improving operations and expanding horizontally through accretive acquisitions. We will continue to work to support Stefano and the management team through Barry’s contribution on the board.”

While Mr. Rosenstein did trim his stake in WBA by 11% during the fourth quarter, the position is his second-largest, valued at over $1.04 billion.

The deal is relatively rich from the perspective of certain valuation metrics, with the $9.00 per share deal amounting to a price-to-book ratio of 156.13 for RAD. The deal also represented a nearly 50% premium from the stock’s closing price the day before it was announced. Furthermore, Walgreens has stated that it will issue new debt to help finance the deal, adding more weight to its already debt-laden books (about $13 billion in long-term debt at the end of August), which may be cause for concern for some investors.

With all of this in mind, let’s check out how some of the other hedge funds in our system have been trading Walgreens Boots Alliance Inc (NASDAQ:WBA) of late.

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