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Analysts: Rite Aid faces challenging outlook after Albertsons deal collapses


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Analysts: Rite Aid faces challenging outlook after Albertsons deal collapses

Rite Aid Corp. faces a tough road ahead against larger competitors including CVS Health Corp. and Walgreens Boots Alliance Inc. after canceling a merger with Albertsons Cos. Inc., while the deal's collapse is likely to force Albertsons to put on hold its plans to go public, analysts said Aug. 9.

"I would hope that they would refocus their efforts on stabilizing Rite Aid before they start looking for another sale candidate," Moody's Vice President Mickey Chadha said Aug. 9 in an interview with S&P Global Market Intelligence.

Pennsylvania-based pharmacy chain Rite Aid and Idaho-based grocer Albertsons announced Aug. 8 that they were dropping a planned merger first announced in February that would have created a $24 billion company with about 4,900 stores, 4,350 pharmacy counters and 320 clinics across 38 states and Washington, D.C.

However, concerns about the prospects of the proposed merger rose after some institutional investors and proxy advisers came out against the merger a week ahead of an Aug. 9 shareholder vote, arguing that it was not a good value for Rite Aid shareholders. The shareholder vote was subsequently canceled.

The pharmacy chain and Albertsons disagreed with that opinion and stood firm on the contours of the deal. Albertsons said in an Aug. 8 statement that the company was "unwilling to change the terms of the merger."

With the termination of the merger, there is a lot of uncertainty for both companies, analysts said.

The Rite Aid deal would have allowed Albertsons to go public, a company goal since at least 2015. An investment consortium led by Cerberus Capital Management LP backs the privately held grocer.

But in the wake of the deal's collapse, Moody's Chadha said an IPO is "unlikely," because Albertsons might not get the valuation it wants from the market. Chadha added that the grocer has not said what valuation it would seek as a public company.

Going public could help Albertsons return money to its investors, Chadha said, adding that the grocer could also explore monetizing its real estate assets, which he estimated at $10 billion to $12 billion in value.

Such a move, though, would likely run counter to Albertsons' past financial practices, the Moody's analyst said.

"We will just have to wait to see what they do," Chadha said.

Albertsons and Rite Aid did not return messages seeking comment on their respective plans. Cerberus did not reply to a message seeking comment on its desires for Albertsons.

Rite Aid must also reassess its plans, which will not happen overnight, according to Ross Muken, Evercore ISI senior managing director and partner.

"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," Muken said in an Aug. 8 research note.

In an interview, Muken said Rite Aid has been in transition for the last two years as it sought a buyer. Rite Aid sold 1,932 of its stores to Walgreens in 2017, and the Albertsons deal would have scooped up the balance.

Since then, pharmacy chains have seen drug pricing changes and increased competition, including Inc.'s recent deal to buy online pharmacy PillPack, Muken said.

"They're sort of coming back to being a stand-alone entity in a more challenging market than what had existed prior," Muken said.

Rite Aid said in the statement announcing the merger termination that it is evaluating governance changes and engaging with investors while moving forward as a stand-alone company.

On Aug. 6, Rite Aid lowered its fiscal 2019 outlook after lower-than-expected generic drug purchasing. The company expects adjusted EBITDA for the year to drop to a range of $540 million to $590 million from a previous forecast range of $615 million to $675 million. Rite Aid also forecasts a net loss between $125 million and $170 million, bigger than a previous projected net loss range of $40 million to $95 million. Adjusted net loss per diluted share is expected to be between zero and 4 cents, down from expectations of adjusted net income per diluted share between 2 cents and 6 cents.

The pharmacy chain has neither the scale nor the balance sheet to compete with larger rivals, Moody's Chadha said.

RBC Capital Markets' George Hill also wrote in an Aug. 9 research note that Rite Aid's scale problem compared to competitors could make it easier to exclude the chain from preferred networks in many markets. The company also likely faces higher drug costs than its larger competitors.

"Rite Aid also does not have strong positioning in the healthcare future we see that is based on vertically integrated, consumer-directed, value-based care," Hill wrote.

Rite Aid shares fell in afternoon trading Aug. 9 to $1.56, a 10.3% drop from the previous day's close.