Rite Aid, Albertsons Call Off $24 Billion Proposed Merger

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The proposed Albertsons-Rite Aid merger is dead. Fearing a negative outcome, on August 8, the day before the scheduled vote from Rite Aid shareholders to approve a $24 billion merger, both parties called off the deal, ending the hope of both retailers to combine forces.

On paper, the billion merger between Albertsons Cos. and Rite Aid Corp., which was first announced on February 20,

seemed like a good fit. Two retailers in segregated but somewhat connected channels searching for new energy would join forces to create an organization where the whole would theoretically 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 numerous 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 the premise that a merger (in which Albertsons would control 71 percent of the equity) would help both companies potentially transform their identities, you probably weren’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 shares continue to plummet, closing at $1.35 on August 16) and the Camp Hill, PA-based drug chain recently announced it would absorb an $80 million hit because of its weaker negotiating position with pharmaceutical companies.