Rite Aid merger with Albertsons called off Ailing drugstore chain’s future remains cloudy.
Drugstore chain, Albertsons say they ‘mutually agreed’ to kill deal
Rite Aid is abandoning its merger with supermarket giant Albertsons after facing opposition from certain investors and advisers, further clouding the ailing drugstore giant’s future.
As its two biggest rivals, CVS and Walgreens, keep getting bigger and more diversified, Rite Aid was hoping to do the same by arranging a tie-up with Albertsons. Privately held Albertsons was hoping to use the deal to go public. Rite Aid and Albertsons said late Wednesday they “mutually agreed” to kill the deal.
The deal’s demise reiterates questions about the future of Rite Aid as a standalone entity. The company has been scrambling to find its footing in recent years as pharmacies face cost pressures in the health care industry, including declining reimbursement funds.
“The termination of the merger with Albertsons leaves Rite-Aid at a big disadvantage as it neither has the scale nor the balance sheet to compete with much larger and well-capitalized rivals like CVS and Walgreens,” Moodys Vice President Mickey Chadha wrote. “Although the termination is also a big blow to Albertsons’ long-desired goal to go public, it is in a better competitive position in the supermarket space than Rite-Aid is in the retail pharmacy sector.”
The combined company was supposed to have about 4,900 locations with 4,350 pharmacies and 320 clinics serving more than 40 million customers a week. Most Albertsons pharmacies were to be renamed Rite Aid. But the deal collapsed after key investors and two investor advisory groups, Glass Lewis and Institutional Shareholder Services, voiced opposition. Among the issues was price, with opponents believing Rite Aid shareholders should be receiving more. The deal was said to be worth $24 billion.
While multiple large investors apparently opposed the deal, investors as a whole are concerned about the merger’s implosion. Rite Aid shares plunged more than 10 percent in midday trading Thursday to $1.56.
“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.
As for whether Rite Aid and Albertsons made sense as partners from a strategic perspective, Neil Saunders, managing director of GlobalData Retail, found the proposal uninspiring.
“The idea of creating a food, health and wellness giant was always fanciful,” Saunders wrote. “Neither Albertsons nor Rite Aid are stellar retailers. The former has a tired and shabby store portfolio that is in desperate need of investment, while the latter also has a retail proposition that is far from cutting edge.”
Rite Aid’s competitors have made moves to bolster their businesses. CVS is close to finishing its massive deal to acquire health insurer Aetna. Walgreens recently bought more than 1,900 Rite Aid stores for $4.2 billion, giving it 9,964 U.S. locations. Rite Aid has about 2,533 stores left. CVS has about 8,130 standalone stores and 1,702 pharmacies inside Target locations. All three major drugstore chains are facing serious threats, including Amazon’s looming decision to enter the online pharmacy business.