Disconnected: Rite Aid and Albertsons Merger Update

The proposed merger between Rite Aid and Albertsons faces a key crossroads type moment on Thursday, August 9th, when a pivotal vote will be made by the Rite Aid shareholders. The proposal on the table would give the shareholders of Rite Aid a reported 30% stake in the new company.

The prior piece on this merger focused on the transition of the pharmacy / drug store channel and the healthcare landscape. This landscape has adjusted further with the entry of Amazon into healthcare with their acquisition of Pillpack and their partnership with Xealth.

A report in Forbes describes a scenario where the Albertsons merger could be done just strictly out of fear of the impact of Amazon’s entry into the marketplace. The merger proposal is for $24 billion to bring the two companies together to compete against CVS (who is in the process of combining with Aetna), Walgreens (a giant company with Alliance Boots growing their presence in Europe), and Amazon.

A report by Bloomberg states that Rite Aid is set to announce a 2019 net loss of $125 million to $170 million, which far exceeds the numbers in the original guidance that they had reported earlier in the year. The speculation is that the people behind the scenes at Albertsons leaked this information ahead of the crucial vote on Thursday. The thought process being that the fear of the loss of value in Rite Aid will force the hand of their shareholders to vote in favor of the merger.

The Amazon partnership with Xealth provides them access into healthcare networks. The pharmacy side of Albertsons and Rite Aid also have clinics that they operate, which if the merger was approved would create a network of 319 clinics nationwide.

The detractors to the Rite Aid merger feel that the company could compete well on its own in the new landscape. The sentiment from some of the shareholders remains that the proposal from Albertsons does not place the proper valuation on the Envision Rx piece of the Rite Aid business model.

Envision Rx is the pharmacy benefit manager (PBM) piece of Rite Aid which has always been a sticking point in this proposed merger. This is a unique attribute of Rite Aid, which many maintain is an undervalued asset of the current proposal. This all comes at a time where two major investment consultant type groups have issued reports that caution the Rite Aid shareholders to consider rejecting the merger proposal.

There is a disconnection between factions of the Rite Aid shareholders over the Albertsons deal. The one side of the scenario is that Rite Aid is a much smaller company now that they have transferred so many store locations to Walgreens. The management of Rite Aid is stating that they feel that they are better positioned now because they will no longer be tied up with the sales of the locations to Walgreens and can focus on improving operations. The central message is that they can survive and compete as a smaller, leaner company without merging.

The other side of the scenario is the faction that feels that Rite Aid must “grow or die” with the “bigger fish” of CVS Caremark (Aetna), Walgreens, and Amazon. The merger with Albertsons will provide a combined company with 4,345 pharmacy locations, which will allow for a much more competitive company in the new landscape of the industry in the future.

Furthermore, there is the reality that Rite Aid stock has lost 77% of its value in the last two years. The Albertsons people are circulating a message that essentially is that Rite Aid will have no other interested parties for a potential merger if this falls through.

In truth, that is probably an accurate assessment because the government shutdown the Rite Aid merger proposal with Walgreens, CVS has no interest in acquiring Rite Aid, and there are not really any other suitors out there in the industry.

Another argument is one that is against the merger which in brief, is that Rite Aid and Albertsons are both struggling in low-margin businesses (pharmacy/drug store and grocery channel) and merging them together will not remedy those core issues related to being niche focused in industry channels that have low profitability.

The grocery channel could potentially provide a regional partner for Rite Aid that could be interested in buying their Northeast and Mid-Atlantic based locations such as Royal Ahold (parent company of Giant, Eagle, and Stop & Shop grocery chains). This is pure speculation on a potential future course for Rite Aid because so many within the financial industry believe that the Thursday vote is going to sink the merger with Albertsons.

This potential merger between Albertsons and Rite Aid has been a mess from the beginning. The path forward for both companies if this merger does not materialize is unclear. Albertsons could shift their focus to an acquisition within the grocery channel, a regional sort of consolidation move to grow the company.

Rite Aid could move forward alone and try to “keep swimming” in the industry without a larger merger partner. They could maximize their revenue streams by executing a strategy around their clinics and with marketing Envision Rx.

The harsh reality is that the pharmacy channel is running scared from the entry of Amazon into their market. The potential for Rite Aid to make it on their own while being squeezed by larger competitors could spell the end for the iconic American drug store chain.

The merger vote on Thursday will impact both the grocery and the drug store channels and could drastically alter the course of the strategic growth for two companies in the future. The consumer will be impacted by a lack of choice and a lack of competition in the industry which will force many consumers into a situation where they are facing increased out of pocket costs for pharmaceutical products in the years to come.

(Some background information and statistics courtesy of Forbes, Bloomberg, and Supermarket News)

The Next Chapter For Rite Aid or Is it the Last Chapter?

The past few years have featured some major mergers and consolidations across a variety of business segments. It is rare to have a proposed “mega merger” result in a change of course, but in the case of the Walgreens deal to merge with Rite Aid in the retail pharmacy space, that is exactly what transpired.

Walgreens, after repeated attempts to find ways to satisfy the anti-trust regulators, announced that they had disbanded their pursuit of a merger with Rite Aid. The most recent proposed framework of the acquisition had Walgreens and Rite Aid both selling store locations to a Southeastern based retail drug store and discount store chain, Fred’s, done in pieces through a series of transactions.

The proposed framework left regulators and industry analysts concerned that Fred’s could essentially double the size of their company overnight and not sustain any major setbacks.

The proposal also left many in the government regulatory positions feeling unsettled with the potential size of the combined Walgreens/Rite Aid chain and the impact that could have on the consumer. The combined entity would also have tremendous influence with pharmaceutical distributors regarding price and other factors, which made interested parties in the pharmaceutical area very concerned as well.

In the end analysis, Walgreens determined that it was no longer a viable pathway to grow their business, and the proposal with Rite Aid was terminated. The transactions with Fred’s never took place, and the whole deal fell apart very rapidly. The natural next question is: what is the next step for Rite Aid?

Rite Aid has sustained five straight losing quarters and their stock has lost a significant amount of value. They will receive $35 million from Walgreens in a termination fee because the merger was scuttled. Rite Aid also announced it will sell about half of their store locations in their current business footprint. Many of those stores will be sold to Walgreens, which is a strange turn of events because regulators were concerned about Walgreens getting bigger if the merger was approved.

Walgreens stands to gain more store locations in certain markets because the merger was scrapped. Some investment analysts maintain that Rite Aid could turn their business around because they will have streamlined their operations to focus on just half the amount of store locations than they have in their current footprint once the sale of the store locations becomes final.

Conversely, some investment analysts and industry experts are concerned that Rite Aid has serious issues and that the company will still fail, despite the efforts to streamline their business operations. The sale of some of these locations will relieve some of the debt load for Rite Aid, but they still have some significant hurdles to overcome.

The strategic decision by Rite Aid to sell all their locations in certain marketplaces will certainly help the company to remain focused on their core customer bases in the Northeast and along parts of the East Coast. The distribution systems should improve in this streamlined approach, and the distribution network will be far more targeted which will also provide cost savings.

Rite Aid is a staple brand in the retail drug store channel, especially in the Northeast. The future of the company is reliant upon their marketing efforts to reconnect with their core customer base in that geographic market. They will also face external pressures from much larger competitors such as CVS/Caremark, Wal-Mart, and Walgreens.

The opportunity for Rite Aid to merge with another competitor is still a possibility, but the best opportunity for their brand was to merge with Walgreens. It is going to be difficult to find another partner that would not want to just swallow them whole, and the other chains are essentially too small to make an impact on their competitive position in the industry segment.

The decision to streamline their operation will, at the very least, buy them some time to reevaluate their options. The next chapter for Rite Aid appears to be a return to their roots, and to focus on their key strategic markets in the Northeast. It remains to be seen if this change in strategy can be enough to bring the company out of the slump that they have been mired in for several months.

It remains to be seen if this next chapter is the last chapter for yet another iconic American brand in an increasingly competitive retail landscape.

Walgreens Ups The Ante For Rite Aide Merger

In a follow up to prior pieces I have done on the proposed Walgreens – Rite Aid merger which would combine two of the largest retail drug chains in the United States, it appears that the proposal is taking another interesting twist.

In reports from Bloomberg and other sources, Walgreens has agreed to increase the number of stores it will sell to Fred’s, a Southeastern based retail drug chain, from 865 store locations to a higher but undisclosed amount. This is being done to “up the ante” to appeal to the Federal Trade Commission (FTC), which in my prior work on this topic, had demonstrated reluctance over the merger proposal.

The FTC displayed so much reluctance that myself and some others who have written about M&A activity of this type, felt that the merger may end up being blocked. That “where there is smoke, there is fire” scenario played out because Walgreens efforts with this enhancement to the deal they have with Fred’s certainly indicates that they felt the merger might get scuttled by the FTC.

In the enhanced version of Walgreens deal with Fred’s, Walgreens would also sell the southern based chain certain distribution centers, technology, and also would transfer some key executives from Rite Aid into similar roles at Fred’s. This was all done to help decrease the concerns that the FTC has seemingly held for the Walgreens-Rite Aid merger with regard to the size and scope of the acquisition.

The enhancement to the deal by Walgreens does not address the underlying cause for skepticism from the FTC in the first place: that Fred’s cannot double the size of its store footprint and survive. The stock price for Fred’s has increased about 30% with all of the renewed activity around this deal.

Walgreens-Rite Aid is currently caught in a scenario that many entities in a merger this large and far-reaching have had to grapple with in the past which is the sale of enough assets to not further dilute your own valuation, but sell enough assets to gain approval from the FTC. It can be a tricky situation and it is not always easy to find another company within your industry segment to make that type of asset sell off transpire in an expedient way.

The emergence of Fred’s in a “right place, right time” type of scenario with their business standing to increase dramatically in size, gain access to new geographic markets, and gain the use of some of the branding power of Rite Aid where the Fred’s brand name does not have the same recognition.

The FTC is reluctant, and they might remain unchanged in those sentiments, because they have been “burned” in the past with approvals of large scale M&A proposals which ended up going badly. Some of those deals ended up also damaging the third party company involved, in this case the role being played by Fred’s, where that third party company swallowed up assets which ended up bankrupting them.

The merger of Walgreens and Rite Aid would create a gigantic retail drug powerhouse that on the one hand could rival CVS, and on the other hand could end up limiting consumer choice. This merger also could have negative potential consequences for consumers with prescription drug costs being set by only a handful of companies. This is the area where some analysts close to this potential merger feel that the FTC is also concerned.

Walgreens maintains that they have grown to their capacity and that the only way that both they and Rite Aid can continue to compete and survive with stiff competition from CVS in this industry space, is to merge together. Walgreens seems intent on doing whatever is necessary to satisfy the FTC in order to consummate this deal. It could even mean involving another retail drug store chain, though I am not sure who that could be at this point. It could be a company like Safeway or Publix but those two companies have a current store geographic footprint that is much different than the Northeast heavy presence of Rite Aid.

The proposal gets complicated by the reports that some within the industry do not understand why Rite Aid is selling, basically with the thought process that being number 3, is a good place to be. Walgreens was pretty dogged in their presentation of offers for the Rite Aid business, continuing to pursue this blockbuster potential merger.

The FTC and other regulators will now review this enhanced version of the deal that Walgreens is offering to Fred’s. A determination will be made on whether the asset divestiture creates a path for the very large merger between Walgreens and Rite Aid to take place.

The exact parameters will become clear in the weeks and months ahead as we head through spring and into the summer months. The outcome is uncertain, but in the past when I have observed a company take the steps that Walgreens has undertaken to gain merger approval, that company usually gets what it wants.

Rite of Passage: Walgreens, Rite Aid, & Fred’s Pharmacy Strike Deal

The retail pharmacy channel had an interesting week as we head toward the end of 2016, with the news that Fred’s Pharmacy chain is planning to purchase 865 Rite Aid store locations. This sale is motivated by the proposed merger between Rite Aid and Walgreens which I covered earlier in 2016.

A number of weeks ago the proposed merger was shifted to an early 2017 completion date because of some regulatory situations. The Rite Aid/Walgreens group decided to sell these locations in an effort to satisfy the Federal Trade Commission and some of their concerns over the potential monopoly the combined entity would have in certain geographic areas.

The exact locations of the Rite Aid locations being sold off to Fred’s Pharmacy has not been disclosed, and will not be disclosed until everything is finalized. The news yesterday had Rite Aid stock price jump 5% overall, and if the transaction is approved, the acquisition would vault Fred’s to the 3rd largest drug store chain in the United States.

Fred’s Pharmacy is a southeastern U.S. based regional drug store brand which also has a division of deep discount stores that compete with Dollar Tree and Dollar General. The company, according to financial news sources, is in the middle of a rebranding strategy to move away from being a discount retailer and shifting their focus to being a health and wellness focused drug store retailer. This transaction will provide them with a great opportunity to complete that type of rebranding effort. That was confirmed by the response in the stock market, with Fred’s Pharmacy shares jumping 81% at one point.

The Walgreens/Rite Aid group had to make some sort of move to divest locations to satisfy the anti-trust regulatory process. The reality in this market is that when you do a “channel check” on retail drug stores, Walgreens had just a few options to make a deal based on the current status in that market space currently. Then I read in Forbes that one of the top executives at Fred’s Pharmacy handled real estate transactions on locations for Walgreens in his most recent previous job, I started to understand the dynamics of this deal and how it was consummated.

The regulatory road has had some hurdles for Walgreens and Rite Aid because it will create a huge company of 12,000 store locations. The merger could benefit consumers because of the power they could possess for obtaining better drug prices from the pharmaceutical distribution companies. The merger could also be a negative for consumers because the company could set higher prices on other products leaving the consumer with little competitive options that could provide savings.

Fred’s is going to greatly expand their presence in the market with their investment of around $900 million to reinvigorate the company and help it to compete with larger regional and national marketplace players.

The deal makes sense for Walgreens/Rite Aid because their merger is estimated at over $9 billion and would completely reshape the retail drug store industry space in the U.S. if it is approved. The areas of health, beauty, and personal care are always in demand by the American consumer and that trend is not about to change anytime soon. Walgreens is planning on having the capability to provide all of those needs in a “one stop” shopping experience for the consumer.

This all bears watching as we will soon flip the calendar to 2017 and watch as the huge companies all get even larger through M&A activity.

(Some background information, statistics, and stock market data courtesy of CNBC, Forbes, and Yahoo! Finance)

Consolidations Abound: Walgreens Strikes Again

In watching the financial news this morning on CNBC and noticed on the stock ticker that Rite Aid was up about 30% which immediately made me curious as to the rationale behind such a big jump. Then, a few minutes later, the news broke that they were in merger talks with pharmacy giant, Walgreens, and it all made sense.


The proposed merger was just formally announced a few minutes ago at the end of the business day here in the Northeast, with Walgreens set to pay $17 billion to obtain Rite Aid. The deal, if confirmed through regulatory channels, would merge two of the top three pharmacy chains in the United States.


Walgreens has been active in recent years with mergers and acquisitions of other regional pharmacy chains, Rite Aid was one of the last major players in the marketplace to essentially complete the major consolidations of the landscape in that industry. The proposed merger would give Walgreens an enhanced presence in the Northeast and Mid-Atlantic regional markets and bolster their competition with market leader CVS.


The other rationale for the merger is to gain leverage with PBMs and other distributors for better pricing on prescription drug products. A combined Walgreens – Rite Aid conglomerate would have a better chance to forge deals with suppliers than if they remained separate entities. This activity comes amidst rising demand for prescription drugs due to the availability of healthcare coverage provided by the Affordable Care Act.


However, the major pharmacy chains such as CVS and Walgreens have been warding off increased competition from club stores and the appealing mail order pharmacy providers which have gained traction in recent years. In a move that received comparatively little mainstream media coverage earlier in 2015, CVS acquired the prescription pharmacy component of Target stores for a little under two billion dollars. The company plans to change over some of the in-store pharmacies to CVS locations within Target floorplans. That represented a big move by CVS to gain a bigger presence in the market and gain penetration into the types of big-box retail stores that have become the main competition for them in recent years.


Walgreens issued a statement today indicating that, at least in the near term, Rite Aid will remain as a brand and that they will not be changing the names of retail locations over to Walgreens. In the future, the Rite Aid name which has stood for decades in the Northeast could disappear. The stock price of Rite Aid did shoot up today in trading by 40% by the end of the day on Wall Street. Conversely, Walgreens was up about 4% at the close of the day.


What does this mean for the consumer? Well, in short, it will mean less competition and less choice in the options for where your family will have their prescriptions filled, it could mean higher prices but ultimately it could provide a better alternative for the consumer if the combined entity is able to leverage distributors into better pricing.


However I always return to the fear of monopolies, whenever too few companies are in control of a commodity as important as prescription drug products, I have to give pause to the consumer. I know that many neighborhood pharmacies today look like retail corner stores with the amount of personal care items they stock, but do not let that fool you, the majority of sales at Walgreens or CVS are still derived from prescription drug products (about 70%).


Consolidations have the downside of eliminating consumer choice from the marketplace, as it did with this proposed transaction. Rite Aid was carrying debt, but it controlled roughly 10% of the prescription pharmaceutical sales in the market and could have lived on without merging with Walgreens. In the end it comes down to the money, and Walgreens made an aggressive bid which provided a roughly 40% premium over the current valuation of the company. If I put it simply: the deal was too good for the shareholders to pass up.


Duke Energy Bets on Natural Gas


The other big merger in the headlines is in the energy industry segment and it involves Charlotte based Duke Energy buying Piedmont in a deal that is massive for Piedmont, and would represent less than 10% of Duke Energy overall. However, the deal reflects the need by Duke to obtain a better position in the natural gas segment of the energy marketplace.


The proposed deal has received some criticism, because if you follow the commodities markets, natural gas is down significantly because of extended periods of mild weather through this Autumn season throughout the USA. Therefore the demand for natural gas is diminished, but it would appear that Duke Energy is banking on a change in that demand curve when the winter months come roaring in.


Most long term forecasters for weather models are split on the amounts of snowfall or major storms we will see this winter but most of them agree that we will not see the record cold temperatures that we did last winter. Duke Energy has a good sense of the marketplace so I am sure that they feel that this investment will yield once the winter gets into full swing.


Natural gas also has a reputation for being cleaner than other energy sources so Duke is most likely going to look to capitalize on that trend as well. It is yet another merger in an increasingly consolidated business landscape.


The next big merger to watch: Bridgestone Tire proposed consolidation of the Pep Boys auto repair chain. In the end I hope that these consolidations will benefit the consumer but I am always reticent when two of the top players in any industry join forces, which is what we had today with Walgreens and Rite Aid; whether or not that benefits the consumer or just limits competition remains to be seen.