Rite Aid, Albertsons Call Off Merger
Deal had faced mounting concern from investors
In a surprise move, Rite Aid Corp. and Albertsons Cos. called off their planned $24 billion merger on the eve of a shareholder vote in the face of mounting protests from investors.
Some of Rite Aid’s biggest shareholders had planned to vote against the pharmacy’s planned merger with privately held grocer Albertsons, unconvinced by the companies’ argument that a deal was necessary to fend off competition from Amazon.com Inc. and others.
Investors who opposed the deal, valued at $24 billion including debt when it was announced in February, said it undervalued Rite Aid’s retail business and its prescription-drug benefit service. They and two major shareholder proxy advisory firms that criticized the deal in recent weeks also questioned the ties between top executives on both sides.
The retailers each said their mutual decision to call it quits was made despite their belief in the deal’s rationale. Albertsons said it disagreed with investors and proxy-advisory firms that felt it had undervalued its offer for Rite Aid, which has a market-capitalization of under $2 billion. Albertsons board declined to change the terms of the merger, the retailer said.
Rite Aid’s stock rose more than 2% in after-hours trading. Most of Rite Aid’s largest institutional shareholders planned to oppose the deal, people familiar with the matter said, and some smaller shareholders also had concerns. Some who own Rite Aid shares said privately they supported the deal because they didn’t see the retailer thriving as a stand-alone company.
Rite Aid said its board of directors would consider company governance changes, and further speak with shareholders “to ensure alignment between the company and its investors.”
Alberta Investment Management Corp., a pension fund for the Canadian province and one of Rite Aid’s 10 largest shareholders, was opposed to the merger on its current terms. Highfields Capital Management, another top-10 investor with around 4.4% of Rite Aid shares, also had said it intended to vote against the deal.
Rite Aid also issued a profit warning Monday, saying it would take an estimated $80 million hit this year due to a weaker bargaining position with drugmakers. Some investors interpreted the profit warning so close to Thursday’s vote as a last-minute effort to drum up support.
“We think investors can easily see through the intent of this,” Susquehanna International Group, LLP, another top-10 Rite Aid investor, wrote in a note to clients.
Under the terms of the cash-and-stock deal, Rite Aid investors would have exchanged 10 of their shares for a share in the combined company plus $1.83 in cash, or alternatively 10 shares for 1.079 new shares.
Private-equity firm Cerberus Capital Management LP had been the main owner of Albertsons for over a decade and had tried to take Albertsons public in 2015. Combining with Rite Aid would have allowed Albertsons to go public and given Rite Aid shareholders about 30% of the company.
“It transforms us from a regional pharmacy player to a leader in food, health and wellness,” Rite Aid Chief Executive John Standley said in a video the company released last month.
Albertsons and Rite Aid are the third-biggest companies in their sectors but competitors including Amazon.com have encroached on their turf. The companies said their merger would have helped fend off tough competition in both the grocery and pharmacy businesses.
Rite Aid said it wanted to expand the food selection at its existing stores, and its number of pharmacies would have nearly doubled by expanding into existing Albertsons stores. Rite Aid sold nearly half its stores to Walgreens Boots Alliance Inc. last year, leaving the Camp Hill, Pa..-based chain with a smaller pharmacy network and less leverage to negotiate drug prices with payers, said Moody’s analyst Mickey Chadha.
In shareholder presentations and on a website for investors, the companies detailed the benefits they saw from a merger, including $375 million in cost savings by 2022.
Rite Aid shares had fallen 22% since February. Stocks in major drug retailers are down more than 4% this year while those in consumer staples are up some 2%. The broader S&P 500 is up 7%.
Institutional Shareholder Services Inc. and Glass Lewis, the proxy advisory firms, said they saw the rationale behind the deal given growing competition in retail, but said it came with numerous risks for investors.
“The merger combines two low-margin, overleveraged companies, both of which are facing heightened competitive environments,” ISS wrote in July.
The advisory firms said the deal, which would have made Rite Aid an Albertsons subsidiary, gave the grocery retailer too much of the benefit from the combined company. ISS and Glass Lewis also questioned how thoroughly the deal was vetted and pointed out close ties between executives at the two companies.
Albertsons Chief Executive Bob Miller previously served on Rite Aid’s board and had served in other roles alongside Rite Aid’s Mr. Standley.
“We find the board completed a deeply flawed process and employed mediocre procedural safeguards,” Glass Lewis wrote.
Rite Aid and Albertsons have said they thoroughly reviewed the deal, and established an independent board committee to evaluate other offers. Federal regulators allowed the deal to move forward in March.