Fred's Shares Pull Back After Its Ability To Handle Rite Aid Store Purchase Questioned

Fred's, Inc. (NASDAQ: FRED), a relatively small discount retailer and full service pharmacy chain, attracted investor attention on December 20 when it agreed to buy hundreds of stores and certain assets from Walgreens Boots Alliance Inc (NASDAQ: WBA) and Rite Aid Corporation (NYSE: RAD) for $950 million in cash.

The announcement sent Fred's market cap soaring from $450 million to $1.3 billion as the stock gained nearly 80 percent on the day the deal was announced.

Fred's stock hit a multi-year high of $21.77 on December 20 after closing at $11.15 the day before. The stock dipped as low as $18.10 on December 22 and closed Tuesday's session at $19.63.

Of particular note, the company's board of directors approved a "poison pill" provision after an activist investor amassed a 25 percent stake.

On Wednesday, the stock dipped more than 4 percent and traded as low as $18.41 during the morning trading session after the New York Post questioned the deal.

Specifically, the Federal Trade Commission has to approve Fred's as a qualified buyer. This may be a tough sell since Fred's acquisition implies it's more than doubling its size and the company may not be equipped to handle a transaction of this magnitude.

Perhaps more importantly, Fred's acquisition is contingent on the FTC and other government regulators giving Walgreens the green light to acquire its smaller rival.