Jewel Osco parent pulls plug on Rite Aid deal

August 09, 2018 07:39 AM

Walgreens' proposed acquisition of the drugstore chain fell apart last year amid scrutiny by antitrust authorities.

(Bloomberg)—Rite Aid shares sank after the drugstore operator’s proposed merger with Jewel-Osco parent Albertsons was called off, leaving the company with dwindling options amid a rapid transformation of the pharmacy business.

The collapse of the deal is the second time an attempt to combine with a larger retailer has failed for Rite Aid, after its proposed merger with Walgreens Boots Alliance last year fell apart. The company will now be forced to search for answers while its bigger rivals overhaul their business models amid wider changes in the health care system and deep-pocketed new competitors including Amazon.com  push into selling prescription drugs.

Retailers have been under growing pressure from online competitors, affecting grocers and the corner drugstore alike. Combining with Rite Aid would have expanded Albertsons to help it combat companies like Amazon that are increasing their food offerings. Amazon also agreed earlier this summer to buy online pharmacy company PillPack for about $1 billion.

Compounding the pressure on Rite Aid, pharmacy giant CVS Health agreed late last year to acquire health insurer Aetna for $68 billion, in a deal that could combine more health services and put increased pressure on standalone drugstores that don’t have in-house drug-benefit managers or insurance operations.
Opposition to the transaction had increased before the expected shareholder vote. Rite Aid and Albertsons, backed by private-equity firm Cerberus Capital Management, opted to pull the plug on the deal late yesterday.

“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,” Rite Aid CEO John Standley said in a statement.

In February, Rite Aid agreed to be bought by Albertsons, in a transaction that would have given shareholders of the grocery chain ownership of more than 70 percent of the combined company. It also would have given the grocer’s private-equity owners a path to exit their 2006 investment without going through an initial public offering in a turbulent market.

In the weeks leading up to the deal vote, however, two prominent proxy advisers recommended that shareholders vote against it. It “does not appear that Rite Aid shareholders would receive a fair ownership interest in the combined company,” said Institutional Shareholder Services in a report in late July obtained by Bloomberg.

Glass Lewis & Co. opposed the transaction, saying it would yield no premium for Rite Aid holders. It also said the negotiations “raise significant questions around possible conflicts of interest” as a Rite Aid board member negotiating the deal had “an ongoing outside relationship with Cerberus.”

While the prescription-drug businesses at pharmacies has been relatively stable, front-of-the-store sales have been in decline. Giant retailers like Walmart Inc. and Amazon.com have been looking to play a bigger role, and the result has been consolidation in the industry.

The Albertsons agreement came after Rite Aid’s failed attempt to sell itself to Walgreens. That merger fell apart last year amid scrutiny by U.S. antitrust authorities. In September, Walgreens won approval to buy 1,932 stores, three distribution centers and related assets for $4.4 billion. The store purchases were completed earlier this year.

The Walgreens deal would have given Rite Aid shareholders at least $6.50 a share in cash. Under the Albertsons deal, Rite Aid shareholders would have gotten at most 18.32 cents a share in stock, plus Albertsons stock.

Shares of Rite Aid declined 12 percent to $1.53 in premarket trading in New York. The drugstore chain has lost more than three quarters of its market value since the beginning of 2017.

Rite Aid management “will now after multiple attempts to sell the business have to go back to the drawing board, which is likely going to be a heavy lift,” said Evercore ISI analyst Ross Muken, who has an underperform rating on the shares.

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