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Albertsons-Rite Aid in Merger Pact: Know the Deal Inside Out

The grocery and drug store industries are about to witness further consolidation with the country’s largest grocer Albertsons Companies proposing to buy the distressed drugstore retailer, Rite Aid Corporation RAD. This deal can be Albertsons’ and Rite Aid’s latest effort to dispel the fear of competition from Amazon AMZN.

Though Rite Aid’s shares reacted positively to the news in the pre-market trading session on Feb 20, this Zacks Rank #3 (Hold) stock has declined 11.8% in the last two days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Overall, Rite Aid has gained 19.5% in the last three months, against the industry’s decline of 0.8%.



The Deal

Per the deal, Rite Aid shareholders have the choice to opt for Albertsons’ shares and cash or only the company’s shares. For every 10 Rite Aid shares, shareholders can get one Albertsons share and $1.83 in cash or 1.079 Albertsons shares. Consequently, Rite Aid shareholders will own about 28-29.6% stake in the combined company, subject to the outcome of the cash elections. Further, Albertsons’ shareholders will own nearly 70.4-72% stake in the combined company.

Depending on the results of the cash election, Rite Aid is likely to be valued at $1.30-2.65 per share under the sale agreement. The combined company is expected to generate annual revenues of about $83 billion. Further, the new entity anticipates delivering annual run-rate cost savings of $375 million in three years. Of these, the companies expect to realize nearly 60% of the cost synergies in the first two years after closing the transaction. Additionally, the companies anticipate identifying about $3.6 billion of potential revenue opportunities.
 
Albertsons’ proposal is backed by investments from Cerberus Capital Management, L.P., along with Kimco Realty Corporation; Klaff Realty, L.P.; Lubert-Adler Partners, L.P. and Schottenstein Stores Corporation.

Following the completion of the merger, the combined company will be steered by John Standley as the Chief Executive Officer (CEO). He is currently the Chairman and CEO of Rite Aid. Further, Albertsons’ current Chairman and CEO, Bob Miller will serve as the Chairman of the new company. With leadership from executives of both companies, the combined entity will have dual headquarters at Boise, Idaho and Camp Hill, Pennsylvania. The name for the new company will be decided as the transaction nears closure. Further, the new company will be listed on the New York Stock Exchange later this year.

Albertsons currently operates about 2,300 supermarket stores and nearly 1,800 pharmacies. Meanwhile, Rite Aid has 2,569 drug stores in operation, following the sale of 1,932 pharmacies to Walgreens Boots Alliance, Inc. WBA for $4.38 billion.

Together, the new company will operate about 4,900 locations including 4,350 pharmacy counters and 320 clinics across 38 states and Washington D.C. The company will serve more than 40 million customers per week. The companies plan to re-banner most of the Albertsons pharmacies to Rite Aid Stores following the completion of the transaction, while Rite Aid will continue to operate its stand-along pharmacies.

The merger has been approved by the board of directors of both companies. Further, it is expected to be closed by the second half of calendar year 2018, conditioned upon receipt of approval from Rite Aid shareholders and other regulatory and customary closing conditions.

Industry Background & Threat of Amazon

Majority of the recent consolidation in the grocery and drugstore industries has been trying to fend off rising competition due to the entry of Amazon in these segments. While Amazon’s entry in the grocery industry was marked by the recent acquisition of Whole Foods, the company recently teamed up with Berkshire Hathaway, Inc. BRK.A and JPMorgan Chase & Co. JPM forming a non-profit company providing healthcare solutions to its employees. This has perked up the drugstore industry’s concerns regarding the e-commerce giant’s entry in the healthcare business.

Further, this threat comes at a time when the drug industry is dealing with challenges like weak reimbursement rates and lower generic drug prices. As the industry players look to cut down costs, the industry continues to witness soft traffic and sales at front-end stores for the last several years. The consequences of these challenges are clearly visible in Rite Aid’s tepid profits in the last two years.

A few more instances of recent consolidation in the drugstore industry are CVS Health Corp’s CVS deal to acquire Aetna, Inc. AET in January 2018, as well as Walgreens’ bid to buy AmerisourceBergen Corp. ABC, a leading drug wholesale company.

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JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
 
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
Aetna Inc. (AET) : Free Stock Analysis Report
 
Rite Aid Corporation (RAD) : Free Stock Analysis Report
 
CVS Health Corporation (CVS) : Free Stock Analysis Report
 
Walgreens Boots Alliance, Inc. (WBA) : Free Stock Analysis Report
 
AmerisourceBergen Corporation (Holding Co) (ABC) : Free Stock Analysis Report
 
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