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Albertsons, Rite Aid seek to leverage customers filling prescriptions

Albertsons Cos. Inc. and Rite Aid Corp., which announced a merger agreement Feb. 20, are looking to squeeze more sales out of customers dropping by the pharmacy counter to fill prescriptions.

In a joint conference call with analysts, executives from the two companies laid out the rationale for the deal, including increased geographical footprint and local leadership, new opportunities for growth, financial strength and targeted synergies worth $375 million in EBITDA over three years.

But the companies are looking to deepen their relationship with customers to drive growth. In particular, the combined entity, if approved, will be looking to bring "more high-value customers into stores," said Rite Aid Chairman and CEO John Standley, who will become CEO of the new company.

Pharmacy customers at Albertsons, the No. 2 grocer in the U.S. by revenue after Kroger Co., on average spend 3.5 times more than shoppers buying only groceries, the companies said in a joint presentation. The average weekly spend at Albertsons by grocery shoppers was about $24, while customers at the pharmacy on average shelled out $26 on their prescriptions and $66 on groceries, or about $92.

"This means the pharmacy customer is the most valuable," said Standley.

The two companies also intend to leverage a base of about 25 million loyal customers. Rite Aid's Wellness+ loyalty program has 12 million members and Albertsons' Just for U program spans 13 million households.

Albertsons operates 2,323 stores in 35 states with 1,776 in-store pharmacies that fill 102 million prescriptions a year. Rite Aid, the No. 3 drugstore operator in the U.S. behind CVS Health Corp. and Walgreens Boots Alliance Inc., has a network of 2,569 stores across 19 states and fills 221 million prescriptions a year.

Robert Miller, chairman and CEO of Albertsons, said that Albertsons pharmacies were "not as profitable" as Rite Aid's. "They are buying better and that is going to help us become more profitable," he said.

The combined entity, which will be named by the time the deal closes, scheduled for early in the second half of 2018, will operate 4,892 stores and 4,345 pharmacies, serving more than 40 million customers a week and filling 323 million prescriptions a year.

Pro forma revenue in 2018 is estimated at $83 billion. In the 12 months to Dec. 2, 2017, Albertsons generated revenue of $59.71 billion, according to its website, versus $31.74 billion for Rite Aid, according to S&P Capital IQ.

Rite Aid in June 2017 agreed to sell about 2,000 stores to Walgreens for $5.18 billion in cash after the two companies abandoned a merger in the face of regulatory issues.

Another category in which the companies expect to drive growth is own-label products, which typically are more profitable for retailers. Albertsons, owner of the Safeway chain, generates 23% of revenue from its own brands compared with 19% at Rite Aid. The combined entity laid out a target for 30% of revenue for own-label products, although it did not give a time frame.

Miller, who will be chairman of the new company, outlined the various channels that the merged entity would better serve customers. These included Albertsons' grocery delivery business and its Drive Up & Go pickup points, which will rise in number by 420 by the end of 2018 from 80 today; Albertsons' same-day delivery service in partnership with Instacart; and the drive-thru services available at more than 1,350 Rite Aid stores.

"We will have multiple levers to create growth and drive value for our shareholders," Miller said. The companies identified $3.6 billion in revenue opportunities.

Under the terms of the deal, Rite Aid shareholders, in exchange for every 10 shares, will have the right to receive 1 share of Albertsons common stock plus about $1.83 in cash, or 1.079 shares of Albertsons. Depending on the options, Rite Aid shareholders will own between 28% and 29.6% of the combined company and Albertsons shareholders the remaining 70.4% to 72%.

On completion, Albertsons, which is backed by a consortium that is led by Cerberus Capital Management LP and includes Kimco Realty Corp., Klaff Realty LP, Lubert-Adler Partners LP, and Schottenstein Stores Corp., will be listed on the New York Stock Exchange.

If the deal is approved, the combined company will have joint headquarters in Boise, Idaho, and Camp Hill, Pa. The company, which will have a real estate portfolio with an appraised value of $11 billion, will have a board of nine directors, four from Albertsons and four from Rite Aid, plus one jointly appointed independent director.

Credit Suisse and Goldman Sachs & Co. LLC served as lead financial advisers to Albertsons and Schulte Roth & Zabel LLP acted as legal adviser. Bank of America Merrill Lynch also served as financial adviser to Albertsons and is providing committed financing for the proposed transaction together with Credit Suisse and Goldman Sachs.

Citi served as financial adviser to Rite Aid, and Skadden, Arps, Slate, Meagher and Flom LLP acted as legal adviser.