Rite Aid Corp. (NYSE:RAD) finally won approval this week to sell nearly half its stores, and three distribution centers, to Walgreens Boots Alliance Inc. (NYSE:WBA) for $4.38 billion, so investors have to wonder what’s left.
What’s left, after the Walgreens deal goes down, is the perfect snack for Amazon.com Inc. (NASDAQ:AMZN).
Amazon, which just got into the grocery business by purchasing Whole Foods Market, has long been rumored to be interested in drugs as well. But it needs a quick way into the business.
Rite Aid provides that. Not only does the company still have over 2,500 stores, along with many trained pharmacists, but it also retains its Pharmacy Benefit Manager, EnvisionRx. That would be the key to the whole deal.
No Way Out of Rite Aid?
What is left of Rite Aid is too small to compete directly with the industry’s new “big four” – Walgreens, CVS Health Corp. (NYSE:CVS), Kroger Co. (NYSE:KR) and Wal-Mart Stores Inc. (NYSE:WMT). Envision is too small to be effective against CVS’ Caremark, Express Scripts Holding Co. (NASDAQ:ESRX), or UnitedHealth Corp. (NYSE:UNH), the giant insurance company that now owns the former Catamaran.
Rite Aid needs to be sold, and there aren’t many good alternatives.
It could try to resurrect its failed merger into Fred’s Inc. (NASDAQ:FRED), but Fred’s is even weaker than it is. It could offer a retail outlet to ExpressScripts, but there’s no indication ExpressScripts is interested. A deal with CVS would run into the same antitrust problems as the Walgreens transaction.
Laura Hoy also believes things are not as bad as they seem for Rite Aid. She thinks the remaining stores, less the debt, could be worth as much as $6 billion, while the current market cap is $2.4 billion. The biggest problem may be that Rite Aid now has demoralized employees and a leadership vacuum, former CEO Ken Martindale having left to run GNC Holdings Inc. (NYSE:GNC)
But if Rite Aid were bought that vacuum would be a feature, not a bug.
What Amazon Can Do
While Rite Aid may be viable on its own, Amazon could do great things with it.
Envision would let Amazon go directly to large employer accounts as a mail-order pharmacist. The Rite Aid stores would provide thousands of new drop-off locations for Amazon returns, many of them in neighborhoods far from a Whole Foods. They could also provide a back-up, by visit or by phone, on prescriptions fulfilled by Amazon. They would assure that the extensive paperwork involved in pharmacy sales was done correctly.
Rite Aid would also provide a branding opportunity. While Amazon is keeping the Whole Foods name on its groceries, it could quickly convert the 2,689 Rite Aid locations to the Amazon brand, dramatically adding to its physical presence.
There should be no antitrust problems with a Rite Aid purchase. The Whole Foods deal breezed through, and Amazon is not currently in the drug business. Rite Aid’s tiny market share in that business also assures no antitrust problem. It’s just the right size.
The Bottom Line on Rite Aid
Amazon would likely have to pay almost $8-10 billion for Rite Aid, including its remaining debt. That would provide a fat premium to existing shareholders, who might be happy to take Amazon stock rather than cash for their shares. With its market cap at over $460 billion, there would be no dilution for Amazon, and since Rite Aid is now viable it could take its time over completing the deal.
It’s the obvious move. But just remember, it’s all in one reporter’s head. It may not happen. Don’t buy Rite Aid solely on speculation. But it’s a nice thing to think about.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
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