When Amazon.com, Inc. (NASDAQ:AMZN) bought struggling Whole Foods Market, it sent shockwaves through the markets. Everything from grocery stocks to dollar stores temporarily fell, while AMZN stock just keep moving higher.
Whole Foods was a strategic move for Amazon in that it created certain synergies with Amazon’s existing and future business plans, and would only benefit AMZN stock.
Which raises the question – who’s next?
Could Rite Aid Boost AMZN Stock?
There are several struggling companies out there that Amazon could scoop up with very little expense on its part. The first that comes to mind is Rite Aid Corporation (NYSE:RAD). We already know that Rite Aid sold off almost 2,000 stores. However, it still has some 2,500 stores remaining and a pharmacy benefit management business.
There has been speculation that pharmacy benefit management would be the next move for AMZN stock. So many pharmacies and Obamacare plans are on the 90-day maintenance medication model, in which orders are placed online and delivered. This fits right into Amazon’s world.
But to do this, Amazon must obtain state pharmacy licenses as well as the infrastructure to sell drugs in a manner approved by the federal government. Why reinvent the wheel when it can be purchased? By purchasing Rite Aid, Amazon would instantly have 19 state licenses, the infrastructure therein, and 2,500 stores in its pocket, along with six distribution centers.
There’s even more synergy. Those 2,500 stores could now become Amazon locker locations, as well as a place for returns. Amazon could pay the $6-10 billion for Rite Aid, including debt, from the $24 billion cash hoard it has; draw down more debt to fund it; or buy RAD stock using AMZN stock.
Rumors Pair Macy’s With AMZN
Another rumor floating around is that Amazon might buy Macy’s, Inc. (NYSE:M). The general idea is that Macy’s is a retailer, just like Amazon, and it skews toward older people.
Thus, Amazon would increase its demographic exposure. Second, Macy’s has hidden value in its real estate and can serve as more warehouse and same-day pickup space.
I think both of these arguments are stretches. Amazon doesn’t need to buy an ancient retail operation to appeal to older consumers, and it would probably hurt the AMZN stock price. Older people are already using Amazon.
As for the real estate operations, Amazon isn’t the kind of company that is going to buy a business for its real estate. If it wanted to do that, it would buy a REIT, even if Macy’s real estate value isn’t reflected in its stock price.
AMZN Is About Convenience
Amazon is about NOT having a brick-and-mortar operation. Whole Foods was an exception. Rite Aid at least offers consumer staples, not discretionary products. Amazon doesn’t want or need same-day pickup locations. Amazon is built on the idea of delivering to the home for convenience.
If Amazon is going to buy any other company, it isn’t going to be for the same reason an activist investor or private equity firm would be interested in.
The one other sector where Amazon might show interest is the rent-to-own sector.
The RTO business is an excellent one if run properly with prudent underwriting, and can generate a ton of cash flow. Rent-A-Center Inc (NASDAQ:RCII) is really struggling these days and has a market cap of only $600 million, plus $724 million in debt. RCII has almost 2,500 locations.
For those who can’t afford to buy appliances, AMZN could just jump right into this sector, close underperforming stores, restructure underwriting and use these existing locations to integrate as both warehouse and distribution center, and for the existing RTO business.
The downside is RTO has a shady reputation, and Amazon may not want to get involved.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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