Foxhole Partners

Rite Aid Was Albertsons's Last Best Hope

There weren't many good options left for shoring up Amazon defenses.
Photographer: Justin Sullivan
At Closing, March 19th
1.58 USD
At Closing, March 19th
66.62 USD

We will soon have a pharmacy/insurer combination. We may yet get a pharmacy/drug-wholesaler merger. And now we're getting a new union of pharmacies and grocery stores with Albertsons Cos.' purchase of Rite Aid Corp., announced Tuesday morning.

This deal has strategic and financial benefits for Albertsons and helps the grocer avoid a choppy IPO market. But it also gets it deeper into the increasingly tough and competitive pharmacy business. 

Whatever You Can Get

Albertsons is stepping in to buy Rite Aid after a more substantial buyout by Walgreens was downsized to the acquisition of nearly 2,000 stores

Source: Bloomberg

The combined company will still be dwarfed pharmacy-wise by rivals CVS Health Corp. and Walgreens Boots Alliance Inc. In fact, it will have fewer pharmacy counters than Rite Aid did before it agreed to sell 1,932 stores to Walgreens last year. 

Back to the Future

A combined Albertsons/Rite Aid will have more scale but will still be a distant third in store count among major pharmacy chains, and smaller than Rite Aid was before it sold stores to Walgreens

Source: Company filings/presentations

As of most recent SEC filing. Rite Aid/Albertsons numbers are estimates from the deal presentation. Walgreens store count is a Gadfly estimate that includes stores acquired from Rite Aid.

Rite Aid was not doing especially well before the deal. Its same-store pharmacy sales have been slumping for more than a year, while those of CVS and Walgreens have been stronger.

Along with its formidable retail scale, CVS has a massive pharmacy-benefit management (PBM) business and is adding a large captive customer base with its $77 billion Aetna Inc. acquisition. Walgreens is getting much larger by taking on those former Rite Aid stores and has a deep relationship with, and ownership stake in, drug wholesaler AmerisourceBergen Corp. -- which it may purchase outright.


Rite Aid same store sales and prescriptions have been declining for more than a year

Source: Bloomberg

On a conference call Tuesday morning, Albertsons and Rite Aid executives suggested the pharmacy chain's PBM unit could help grow the new company's customer base. While it is a potentially important source of revenue and cost savings for the pharmacy arm, it's a minnow in terms of market share. It will likely take time and significant investment before it can drive substantial customer traffic. 

Way Back of the Pack

Rite Aid's PBM business may be a substantial customer driver some day, but it is still very much a niche player

Source: Bloomberg/company filings

But there are benefits to the deal that may make all these risks more bearable.

Albertsons noted on the call that pharmacy customers are among the most valuable in the grocery business, spending more than twice as much on groceries per week as the average customer and more than three times overall. Rite Aid's well-known brand and pharmacy expertise should help Albertsons attract new customers to its in-grocery pharmacies. The new company will have a particularly strong presence on the West Coast. And Albertsons may help revive Rite Aid's "front-of-store" retail business in its remaining stand-alone pharmacies with a more-compelling grocery option.

Perhaps the biggest motivation for the merger is that Alberstons can finally go public without needing to, well, go public. Cerberus Capital Management, its private equity backer, had to hold off on an IPO once again last year when Whole Foods Market sold to Inc., sucking the life out of grocery stocks. Cerberus and Albertsons had tried to negotiate their own deal with Whole Foods, but who would choose them over Amazon? Before that, in 2015, market volatility and a large dip in Walmart Inc.'s share price had scared Albertsons off from the public market. And so an S-1 filing originally dated July of that year has just been sitting there.

The combined company expects cost synergies to contribute $375 million to Ebitda within three years -- though that comes at a price. As with many megadeals these days, Albertsons is letting its debt balloon. 1 Net leverage at the new Albertsons will start at 3.8 times Ebitda, which it plans to reduce to 2.75 within three years. 

Heightened competition for M&A means companies increasingly aren't getting their top pick of acquisition targets (Albertsons even approached Sprouts Farmers Market Inc. earlier last year). But that's not stopping them from scurrying in the final days of super-low interest rates to find back-up deals with the hope that scale -- at whatever the cost or of whatever type -- will keep Amazon from crushing them.

It's a high risk. But there aren't a lot of appealing options out there, and Albertsons had largely exhausted them. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Still, it's not quite to the degree of CVS's Aetna transaction. CVS is adding $45 billion in new borrowings to enter the health-insurance business, pushing its adjusted debt to 4.6 times Ebitda.

To contact the authors of this story:
Max Nisen in New York at
Tara Lachapelle in New York at

To contact the editor responsible for this story:
Mark Gongloff at

Before it's here, it's on the Bloomberg Terminal.