Taking Stock

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On Eve Of Vote, Albertsons, Rite Aid Call Off $24 Billion Merger Agreement 

On paper, the $24 billion merger between Albertsons Cos. and Rite Aid Corp. seemed like a good fit. Two retailers in segregated but somewhat connected channels searching for new identities that would join forces to create an organization where the whole would be greater than the sum of its parts.

And the type of organic and financial synergies that could be created by such an alliance portended of a lot of opportunities for each company to better compete in a world where other existing and emerging retailers have taken away market share from both Albertsons and Rite Aid.

The deal would have combined the assets of the second-largest supermarket operator with the third-largest drug chain in the U.S. The two retailers would have joined to form a company with annual revenue of approximately $83 billion and with 4,900 total stores – 4,350 pharmacies and 320 in-store health clinics across 38 states and the District of Columbia.

Of course, there were other compelling reasons why this deal needed to be done in the minds of the decision makers at both retailers. And in the end, it was those issues that ultimately killed the deal.

If you buy my premise that a merger (in which Albertsons would control 71 percent of the equity) would help both companies potentially transform their identities, you probably aren’t a Rite Aid shareholder.

Those investors could see other issues that were germane to their interests, primarily the value that they would receive for potentially becoming a minority stockholder in a deal they believed was undervalued (Rite Aid holders would have swapped 10 of their existing shares for one share in the new company plus $1.83 in cash, or as an alternate, 10 shares for 1.079 new shares).

Clearly the momentum was strongly against the deal, especially when some of Rite Aid’s largest institutional and private investors said they would not vote to approve the merger, and the deal was killed by both parties less than 12 hours before Rite Aid’s shareholders would have voted on it.

And while several analysts we spoke to acknowledged that the deal could have helped both companies, they also said that one of the catalysts that drove the deal was Cerberus Capital management’s strong desire to ultimately pull out of its 12-year investment in Albertsons (if the deal was consummated, the company would have become a publicly-traded one because of Rite Aid’s current status). They also noted that Rite Aid has lost more than 20 percent of its value over the past six months (its share closed at $1.74 on August 8) and recently announced it would absorb an $80 million hit because of its weaker negotiating position with pharmaceutical companies.

Obviously, Albertsons was disappointed about the news, stating, “Albertsons Companies believes that the strategic rationale of the Rite Aid combination was compelling, including the $375 million of cost synergies and $3.6 billion of identified revenue opportunities. We disagree with the conclusion of certain Rite Aid stockholders and third-party advisory firms that although they acknowledged the strategic logic of the combination, did not believe that Albertsons Companies was offering sufficient merger consideration to Rite Aid stockholders. Consistent with Albertsons Companies’ disciplined approach to mergers and acquisitions, and after careful consideration of all information available to our board of directors through today, we were unwilling to change the terms of the merger.”

It would have worked out much better for Rite Aid if the original Walgreens deal had been completed. However, FTC concerns about store overlap killed the initial offer which ultimately became a diluted transaction where only about 1,900 Rite aid stores were sold to the Deerfield, IL-based drug chain.

While the price of that deal was considerably better than the one Albertsons offered ($4.38 billion for those stores – a market value of approximately $2.25 million per unit), it weakened Rite Aid, which had made a nice comeback in recent years under the leadership of CEO John Standley (who at one time worked for Albertsons CEO Bob Miller at both Ralph’s and Rite Aid where Miller once served as chief executive himself).

So, now both companies will continue to go about it on their own. “We remain excited about the improving momentum, financial strength, and industry leadership of Albertsons Companies. Our team has remained laser focused on execution to drive our financial and operating performance, while ensuring we continue to meet and exceed the needs of our customers. As a result, we have achieved a number of significant milestones, including delivering consecutive quarters of top-line and bottom-line growth, and as part of the Safeway merger, which is delivering higher than expected synergies, we will be completing the systems integration of the Albertsons stores to in-house systems in September. We also have continued to differentiate ourselves through our best-in-class ‘own brands’ portfolio that is expected to add over 1,100 new items this year as well as through our expanding eCommerce offerings, which grew 108 percent year-over-year in the first quarter. The operational improvements we are making to meet our customers’ needs are driving our improved results. We are confident that our 275,000 dedicated employees will continue to execute on our business plan to enhance our customers’ experiences and lead the grocery industry with new innovations.”

Rite Aid, too, said it would persevere, adding that it would consider corporate governance changes and continue to speak to its shareholders.

“While we believed in the merits of the combination with Albertsons, we have heard the views expressed by our stockholders and are committed to moving forward and executing our strategic plan as a standalone company,” said Standley. “We remain focused on leveraging our network of conveniently located retail pharmacies, our EnvisionRxOptions PBM and our trusted brand of health and wellness offerings. We will continue building momentum for key areas of our business like our innovative Wellness store format, highly successful customer loyalty program and expanded pharmacy service offerings, as we also enhance our omni-channel and own brand offerings to strengthen our competitive position and create long-term value for stockholders.”

Something tells me that there’s more to come from both parties in terms of deal making. Don’t even discount the possibility of Albertsons sweetening the deal at a later date.