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After Two Failed Mergers, Where Does Rite Aid Stand Now?

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Rite Aid’s efforts to sell itself

Struggling with the company’s financial position, Rite Aid’s management has tried to sell the company’s assets since 2015. Initially, it decided to sell all its assets to Walgreens (WBA) in October 2015. However, the deal fell apart due to regulatory hurdles, and Walgreens finally managed to get the nod for about half the number of stores and three distribution centers.

In February this year, the company took another step toward turning around. It announced its intention to merge with grocery store giant Albertsons. The deal included 2,569 stores and the Pharmacy Benefit Manager business, which weren’t already sold to Walgreens last year.

However, this deal didn’t go through either. The two companies mutually terminated the merger agreement in August—just a day before the shareholder vote. Opposition from retail investors, who argued that the deal undervalued Rite Aid, drove the termination.

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Now what?

Rite Aid’s smaller footprint after store sales to Walgreens should make it hard for the standalone company to fight its cutthroat competition.

The company’s highly leveraged balance sheet is another major problem. Rite Aid has a net debt to adjusted EBITDA ratio of 4.8%. Moody’s placed the drug store chain on review for a downgrade following the merger’s termination.

As we discussed in parts 3 and 4 of the series, sales growth and profitability have been dismal at the company. Rite Aid’s same-store prescription growth has remained flat for some time, compared to 4% or higher increases at CVS Health (CVS) and Walgreens. The company has a trailing-12-month operating margin of 0.3%, compared to 4.5% for Walgreens and 3.2% for CVS Health.

The termination of the merger led to some Wall Street analysts turning bearish on the company and dragged the stock price further down. Read on to the next part of this series for RAD’s recent stock market performance and Wall Street recommendations.

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