By David Benoit

Pharmacy chain Fred's Inc. handed an activist investor a quick gain this week.

The small pharmacy operator's shares shot up 81% on Tuesday after it announced it would more than double its size by purchasing 865 stores Rite Aid Corp. needs to sell to close its merger with Walgreens Boots Alliance Inc.

The deal paid off handsomely for small activist, Alden Global Capital, which had been quietly building a large stake in Fred's, according to a person familiar with the matter and a document reviewed by The Wall Street Journal. The hedge fund kept buying even after the rise and now owns nearly 25%.

Alden supports the deal and believes the stock is undervalued even after this week's huge bump, the person said. The firm plans to talk to Fred's about the deal, capital allocation and the makeup of its board, the person added.

A Fred's representative wasn't immediately available to comment Thursday.

All told, the purchase cost Alden about $158 million and was worth $180 million as of Thursday's close, a quick 14% return.

The size of Alden's stake in Fred's is unusual for an activist, who typically stay under 10% before disclosing their positions. It is likely to give Alden considerable sway if it wants to seek a board seat in the future.

In 2010, William Ackman teamed up with Steven Roth's Vornado Realty Trust to amass a combined 26% stake in retailer J.C. Penney Co. The purchase kicked off a still-simmering battle among corporate defenders and activists about whether the Securities and Exchange Commission should force activists to disclose positions faster once they cross the 5% reporting threshold. Activists are allowed to continue buying after crossing the threshold but must report within 10 days of passing the mark.

Fred's had 650 stores as of Oct. 29 and is financing the all-cash deal by pledging nearly all of its assets for $1.65 billion in loans. It will pay $950 million for the stores. Chief Financial Officer Rick Hans said it got a "very good" price for the stores.

Write to David Benoit at david.benoit@wsj.com

(END) Dow Jones Newswires

December 22, 2016 17:48 ET (22:48 GMT)

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