Rite Aid pre­scrip­tion be­came a bit­ter pill

The Oklahoman (Sunday) - - BUSINESS -

Dear Mr. Berko: I bought Rite Aid stock at $6 in 2015, think­ing the ru­mored buy­out by Wal­greens would give me a nice short-term profit. Could you ex­plain to me what hap­pened to the stock? Does Al­bert­sons or Wal­greens own Rite Aid? Do you think I will ever break even?

— HL, Ok­la­homa City

Dear HL: Al­bert­sons, a large non­pub­lic gro­cery chain, re­cently an­nounced that it plans to ac­quire the Rite Aid (RAD-$1.69) stores that haven't been sold to Wal­greens, and the deal re­ally "sphinx." The an­nounce­ment ended a 30-month fight by Wal­greens Boots Al­liance (WBA-$64), which orig­i­nally at­tempted to pur­chase all of RAD's stores for $17 bil­lion in Oc­to­ber 2015. The starry-eyed, Har­vard-ed­u­cated an­titrust boys in Wash­ing­ton nixed that deal. In June 2017, WBA tried again to ac­quire all of RAD's stores — this time for $9.3 bil­lion. Still, the gov­ern­ment's an­titrust kids put the ki­bosh on the deal. Then WBA of­fered to buy half of RAD's lo­ca­tions for $5.6 bil­lion, but the an­titrust geeks in Wash­ing­ton hosed the deal again. WBA fi­nally pur­chased 1,932 Rite Aid lo­ca­tions in Septem­ber 2017 for $4.4 bil­lion. And WBA's man­age­ment plans to close 635 stores that aren't worth a box of used pa­per clips.

To­day there are 2,670 RAD lo­ca­tions re­main­ing, and if share­hold­ers were to re­ject the Al­bert­sons deal, this stream­lined busi­ness would prob­a­bly al­low RAD to re­turn to the black in fis­cal 2018. The top line for RAD stores is ex­pected to trend lower be­cause of the lower store base, but man­age­ment is con­sid­er­ing us­ing the pro­ceeds from the sale to WBA to pay off debt and lower in­ter­est costs. RAD stores could be on the road to prof­itabil­ity, and Value Line has a $5 price pro­jec­tion. Earn­ings are ex­pected to be 3 cents a share this year. Some ob­servers and share­hold­ers feel there would be hope on the hori­zon if RAD ig­nored Al­bert­sons and re­mained pub­lic with 2,670 stores.

How­ever, RAD's chair­man and his ex­ec­u­tive com­mit­tee don't see it that way, and Al­bert­sons plans to pay $2.6 bil­lion, or just un­der $1 mil­lion per store, to ac­quire the re­main­ing stores. WBA paid $2.3 mil­lion per lo­ca­tion. Some­thing's rot­ten in Den­mark. But con­sid­er­ing the pre­vi­ous brouha­has plus the ifs, ands and buts over the past few years, RAD's stock­hold­ers have to be suf­fer­ing from share­holder's fa­tigue. In April 2017, RAD was trad­ing at $6 a share, and share­hold­ers were in a blue funk. Now, af­ter nearly 30 months of tu­mult, some share­hold­ers don't give a hoot that the Al­bert­sons of­fer is re­ally stinky.

For ev­ery 10 shares of RAD, the RAD share­holder would get one share of Al­bert­sons, which would go pub­lic af­ter the deal, plus $1.83 in cash. ABS would be­gin trad­ing at $23 if the deal were to be com­pleted. So ev­ery 10 shares of RAD would be worth $24.83, mean­ing each share would be worth about $2.48. But I'm not con­vinced that Al­bert­sons is worth $23 a share. Even though the ac­qui­si­tion would bring in $390 mil­lion in syn­er­gies, even though the ac­qui­si­tion would in­clude RAD's En­vi­sionRx phar­macy ben­e­fit man­ager, even though that PBM would in­clude 285,000 Al­bert­sons em­ploy­ees, even though 2,670 new lo­ca­tions could lever­age lower drug costs and even though traf­fic at RAD stores could im­prove Al­bert­sons' gro­cery rev­enues, I think Al­bert­sons' stock would trade between $14 and $17 a share. Gro­cery rev­enues are in the dog­house and de­clin­ing. Last year, Kroger — the largest U.S. food re­tailer, with $110 bil­lion in rev­enues — watched rev­enues fall by 20 per­cent, and the rev­enues of re­gional su­per­mar­kets had even steeper de­clines. Mean­while, Al­bert­sons' net profit mar­gins (es­ti­mated at 0.9 per­cent) are very con­cern­ing in an in­dus­try in which the av­er­age net profit mar­gins are 1.5 per­cent.

Al­bert­sons would have to trade at $60 for you to re­ceive the $6,000 you paid for 1,000 shares of RAD. I think you'd have a bet­ter chance of break­ing even if share­hold­ers re­jected the Al­bert­sons deal and new man­age­ment took over the re­main­ing 2,670 Rite Aid lo­ca­tions.

Please ad­dress your fi­nan­cial ques­tions to Mal­colm

Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@ya­hoo.com.

Mal­colm Berko mjberko@ ya­hoo.com

TAK­ING STOCK

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