Fred's Climbs After Hedge Fund Reports Nearly 25% Stake
Shares of Fred's, Inc. (FRED) spiked in pre-market trading after Alden Global Capital reported a nearly 25% stake in the company, with the hedge fund calling shares undervalued.
ALDEN STAKE: Alden Global Capital yesterday reported in a regulatory filing that it has taken a 24.8% stake in Fred's. The hedge fund said it purchased the stake on its belief that shares are undervalued and represent an "attractive" investment opportunity. In the filing, Alden said it intends to engage in discussions with Fred's board regarding Fred's recent agreement to acquire 865 stores from Rite Aid (RAD).
RITE AID DEAL: Earlier this week, Fred's surged after agreeing to buy 865 Rite Aid stores that are being divested as a condition of the pending acquisition of Rite Aid by Walgreens Boots Alliance (WBA). The sale is being entered into in response to concerns raised by the Federal Trade Commission over Walgreens' proposed acquisition of Rite Aid that was first announced in October 2015. At the time, Fred's Pharmacy Chief Executive Officer Michael Bloom commented that the planned deal will be a "transformative event" for Fred's Pharmacy that will accelerate its healthcare growth strategy and also "create tremendous opportunities for both our new and existing front of store and pharmacy team members." Fred's plans to run the acquired stores under the Rite Aid banner for two years and believes the acquired stores will be accretive to earnings and generate "substantial" cash flow. The deal is expected to close in the first half of 2017. Following the deal announcement, Sidoti analyst Gregory Pendy downgraded Fred's to Neutral from Buy, citing "limited upside" to its $12 price target after a recent surge in shares. While the analyst believes Fred's has long-term potential for a 3% operating margin, the firm is also balancing this view with "near-term execution risks."
PRICE ACTION: Fred's is up about 5% to $20.35 per share in pre-market trading.
Disclosure: None.