Shares of Rite Aid Corp. took a bath Monday morning after Walgreens Boots Alliance Inc. slashed its takeover offer by more than $2 billion as part of an effort to obtain regulatory clearance for their long-drawn-out merger.
The new terms -- $6.50 to $7 a share, rather than the original $9 -- may sound like a raw deal for Rite Aid's shareholders. However, the $6.1 billion company's financials have also worsened in the year and three months since it agreed to sell itself to Deerfield, Illinois-based Walgreens.
Rite Aid's same-store sales were down or flat during the past four quarters, and in the most recent period they sank 3.4 percent. That's the biggest drop since at least 2000, as far back as the data go. While front-end sales barely fell, the figure was dragged lower by pharmacy same-store sales, which suffered a 4.7 percent decrease (attributed to new generics).
Ebitda has dropped to $1.1 billion for the past 12 months, versus almost $1.3 billion before the merger was struck in late 2015. And its operating margin has been squeezed to less than 2 percent -- meaning Rite Aid is earning less than 2 cents on each dollar of sales. That compares with 5 percent to above 6 percent for Walgreens and other rival CVS Health Corp. in the past few quarters.
In a very unusual move, the companies will base the ultimate deal price on how many stores they're required to divest. If it's 1,000 or fewer locations, Rite Aid investors get $7 a share. If it's 1,200, then the offer is reduced to $6.50 a share. (If the store count falls somewhere in between, there will be a pro-rata adjustment to the price.) The companies also extended the merger deadline to July 31, which unfortunately for arbitrageurs leaves time for potentially more hiccups.
Including Rite Aid's debt load -- now heftier than its market cap -- the transaction is valued at up to $14.6 billion, according to Bloomberg's calculations. That's 13 times Rite Aid's trailing 12-month Ebitda, still a richer multiple than CVS fetches in the public market. That said, analysts do see Rite Aid's profitability improving in the future.
The real winner may be Fred's Inc., the Memphis, Tennessee-based retailer that had already agreed to purchase 865 Rite Aid locations to help facilitate the merger. Its shares are up 10 percent since Walgreens and Rite Aid announced their deal.
Should Fred's agree to take on more stores, hopefully it's not catching a falling knife. As my Bloomberg News colleagues have pointed out, the Federal Trade Commission's track record in trying to avert competition problems through merger concessions isn't perfect. Fred's, however, has a clean balance sheet -- even if it is losing money on an operating basis -- and it's also in a strong negotiating position as Walgreens is under the gun to get get these stores sold and Rite Aid's assets have lost some value. While grocery giant Kroger Co. was also interested in buying some Rite Aid stores, the company was turned off after the FTC reportedly forbade it from shuttering locations that overlap with its own.
Is all this even worth it for Walgreens? Analysts from Barclays write that acquiring Rite Aid "does little to improve Walgreens's strategic position" and that the store divestitures "will extend to many of Rite Aid's most profitable locations." About $10 billion of shareholder value has been destroyed at Walgreens over the course of this merger. It certainly wouldn't be the first time that pre-merger headaches foreshadowed post-merger problems.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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