Albertsons to buy rest of Rite Aid as Amazon threat looms

Companies
31
0

(Reuters) – Supermarket operator Albertsons Companies Inc will buy the rest of Rite Aid Corp (RAD.N) not being sold to Walgreens Boots Alliance (WBA.O), the latest in a string of drug industry mergers to tackle the threat of Amazon.com Inc (AMZN.O).

Shares in Rite Aid fell 30 percent in the six months after Walgreens agreed to buy half of its stores, with investors judging the smaller pharmacy chain was in danger of being left with little scale and negotiating power to beat down drugmakers and insurers on price.

Its stock initially surged by as much as 25 percent on Tuesday after the announcement of Albertsons purchase, which bring it more than 2,500 retail locations and a pharmacy benefits business.

Those gains almost completely evaporated in the 90 minutes after the opening bell.

Albertsons said its buyout, which will allow it to unify its own retail pharmacy operations under the Rite Aid brand, would give it greater clout with patients and drug industry players alike.

“The new company will have an expanded footprint and be ranked first or second in 66 percent of the top metropolitan areas in the United States and will be ranked first or second in 70 percent of pharmacy locations,” the company said.

Albertsons owns about 2300 supermarket stores mainly on the East and West coasts of the United States and also operates about 1800 pharmacies. Rite Aid owns about 2,569 drug stores, after it sold 1,932 pharmacies to Walgreens for $4.38 billion.

Following the deal’s close, the combined company would generate about $83 billion in revenue, operating about 4,350 pharmacy counters, and 320 clinics across 38 states and Washington, the companies said in a statement on Tuesday.

Within about three years the combined company is expected to deliver annual run-rate cost savings of $375 million, with more than 60 percent within the first two years, the companies said.

The combined company is expected to generate pre-tax earnings of about $3.7 billion within three years, they said.

TOUGH MARKET

The deal also follows Amazon.com Inc’s (AMZN.O) move to team up with Berkshire Hathaway Inc (BRKa.N) and JPMorgan Chase Co (JPM.N) to form a not-for-profit company to provide health care for their employees, challenging the existing U.S. healthcare system.

The threat of Amazon making further inroads has jolted U.S. drug store chains into action after several years of declines in traffic and sales at front-end stores.

Larger rival CVS Health Corp (CVS.N) reached a $69 billion deal to buy insurer Aetna Inc (AET.N) last month, while Walgreens is also reported to have made a takeover approach for drug distributor AmerisourceBergen Corp (ABC.N).

“Drug retailing has had its own challenges with reimbursement pressure and weak front-end sales as evidenced in Rite-Aid’s weak profits over the last couple of years,” said Mickey Chadha, a Vice President with credit ratings agency Moody‘s.

“Competing with much larger and more diversified drug retailers like CVS and Walgreens will be a formidable challenge,” he said.

Based on the enterprise value of both Albertsons and Rite Aid, the combined company is valued at $24 billion, an Albertsons Companies’ spokeswoman told Reuters.

Rite Aid shareholders can elect to get either one Albertsons common share plus about $1.83 in cash, or 1.079 Albertsons common shares for every 10 shares they hold, Albertsons and Rite Aid said in a joint statement on Tuesday.

Depending on whether Rite Aid shareholders chose to be paid in cash and Albertsons stock or only stock, the deal values Rite Aid at between $1.30 and $2.65 per share, Evercore ISI analyst Ross Muken said.

Following the deal’s expected close in early in the second half of this year, Rite Aid shareholders will own between 28 percent and 29.6 percent of the combined company, while Albertsons’ shareholders will own the rest based on the elections, the companies said in a statement.

Additional reporting by Shalini Nagarajan and Vibhuti Sharma in Bengaluru; Editing by Anil D’Silva and Savio D’Souza

Facebook Comments

POST A COMMENT.