Rite Aid, traded on the NYSE under the symbol RAD, announced an agreement to merge with privately held Albertsons on February 20, 2018. As information to assess this deal becomes available, shareholders do not like what they see.
We believe the merger agreement grossly undervalues the remaining Rite Aid assets. In the recently filed Albertsons Form S-4, the Rite Aid Board relied upon a “fair value” opinion from Citigroup that valued the remaining 2,500 pharmacies and Envision Pharmacy Benefits Manager (PBM) at $1.83 to $2.96 per share, a pessimistic valuation compared to Rite Aid’s just finished sale of 1,900 lower performing pharmacies and 3 distribution centers for $4.375 billion. Conversely, Citigroup’s “fair value” opinion valued Albertsons at between $23.42 to $29.06, a generous valuation considering that Albertsons has tried but failed to execute an initial public offering of shares due to low demand and negative investor sentiment toward traditional grocers.
We believe the merger agreement raises the investment risks of RAD shareholders by merging Rite Aid into a deeply indebted Albertsons entity that operates in a highly competitive food retailing business. In the last year, Rite Aid has successfully sold assets at attractive prices to smartly reduce outstanding debt. Conversely, in the last year, Albertsons has paid a $250 million dividend to its private shareholders and executed a sale/leaseback of $1 billion in assets to fund capital spending rather than manage leverage. Meanwhile, the food retailing business has gotten more competitive with Amazon’s purchase of Whole Foods and all major food retailers entry into the pick-up and home delivery markets. Also Albertsons investors will be looking to cash out of their merged company positions as soon as their relatively short lock-up periods expire further dampening the outlook of the merged company’s equity value.
The stock market has assessed the value and risks of this merger with a precipitous price drop of 30% in Rite Aid stock from its price on the day of the merger announcement. Moody's has completed their assessment of the new debt to be issued to implement the proposed merger (rating of Ba2 - speculative and subject to substantial credit risk)and assigned a negative outlook due to pricing pressures in the food and drug retail sector, meaningful integration and execution risks, and high debt leverage. Both the equity and debt markets have shown zero excitement for the proposed merger.
We welcome any strategic transaction that appropriately values Rite Aid assets, but this particular deal is clearly not with the correct partner, and Rite Aid shareholders are better suited to either seek new offers or continue with the current Rite Aid business plans of regional focus, PBM-driven growth, and a 10 year generic drug purchase agreement with Walgreens.
One Rite Aid shareholder has set up a website, www.riteaidmerger.com, for further information and for those supporting “AGAINST” the proposed merger. If you support this “AGAINST” position, join hundreds of other investors and please log your e-mail and shareholding in the table provided so we can send Rite Aid management the message loud and clear. We encourage institutional shareholders to join us publically or privately. If you have any questions, please contact individual shareholder volunteers for this effort Chris Komatinsky ((310) 947-4507 or komatinskys@outlook.com) or Andrew Bode ((970) 765-8450 or andrew@shorecrestam.com)
