Fallout from a failed merger

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The eleventh-hour collapse of the merger between Albertsons Cos. and Rite Aid Corp. in the face of opposition from the latter’s shareholders raises a host of questions for the two companies and the people who run them.

The plug was pulled earlier this month, less than a day before Rite Aid stockholders were to have voted on the $24 billion deal, which would have created one of the nation’s largest food and drug retailers, with annual sales of $82 billion.

Although there was general agreement about the rationale behind the merger, the ­dissenters, whose view was backed by two influential investor advisory firms, Glass Lewis and Institutional Shareholder Services (ISS), asserted that Rite Aid was undervalued in the deal. Confronted with the prospect of imminent defeat, the companies agreed to terminate the merger after the Albertsons board of directors decided against upping the ante to try to win over reluctant Rite Aid shareholders.

“While we believed in the merits of the combination with Albertsons, we have heard the views expressed by our stockholders and are committed to moving forward and executing our strategic plan as a stand-alone company,” Rite Aid chairman and chief executive officer John Standley, who was slated to become CEO of the merged company, said after the transaction was scrapped.

The task will be much more difficult for the drug chain without the scale that would have resulted from the tie-up with Al­bert­sons. With 2,550 drug stores in 19 states, Rite Aid lacks the density and nationwide coverage of Walgreens and CVS Pharmacy, which each have around 10,000 outlets, putting it at a disadvantage in the competition for PBM contacts as well as in price negotiations with pharmaceutical manufacturers and front-end suppliers.

Together with Albertsons, the company would have operated 4,327 pharmacies and a total of 4,900 stores in 38 states and the District of Columbia.

In light of the company’s recent experience, there is a certain irony in Rite Aid’s quest for scale.

The drug chain agreed to be acquired by Walgreens Boots Alliance for $17.2 billion in cash in October 2015. After the proposed sale ran afoul of government regulators and went through several iterations, a deal was struck in June 2017 under which WBA purchased 1,932 Rite Aid outlets and related assets for $4.375 billion.

Beyond the benefits of increased size and buying power, the merger would have given Albertsons and Rite Aid an opportunity to leverage synergies between nutrition and health care. Many retailers pay lip service to the advantages of operating at the nexus of those two categories, but only a handful have made substantial progress in that regard. With Standley, Albertsons chairman and CEO Bob Miller, and several other executives from the two companies possessing experience in both supermarket retailing and community pharmacy, the combined entity would have had the know-how required to develop a compelling new model and roll it out on a national scale. That will be a much taller order for each of them as a stand-alone organization.

For Albertsons, the demise of the merger frustrates its plan to join the ranks of publicly traded companies. Formed in 2006 with the backing of a group of investors led by Cerberus Capital Management, the current iteration of Albertsons skillfully executed an M&A strategy to grow from humble beginnings — 661 supermarkets that, in Miller’s words, “nobody wanted” — into one of the leaders in the food/drug combination store field with 2,318 outlets in 35 states generating $61 billion a year in revenue. By merging with Rite Aid, which is traded on the New York Stock Exchange, Albertsons had intended to go public, pay off investors and reduce its $12 billion in debt.

The deal would have addressed one more issue for Albertsons. The ascension of Standley as chief executive officer of the combined company would have answered questions about the successor for the 74-year-old Miller, who would have remained chairman. Like several other Albertsons and Rite Aid executives, the two men have a long-standing relationship, a fact that would have facilitated the assimilation process, but raised concerns for Glass Lewis, ISS and others.

The combination of the two retailers clearly would have been good for both of them. It is unfortunate that many Rite Aid stockholders apparently viewed the deal as an acquisition and not a merger. By blurring the lines between the two types of transaction, as is commonly the case, they failed to give enough weight to the long-term operational benefits — the companies had identified $375 million in synergy savings and $3.6 billion in new revenue opportunities — and the enhanced competitive position that would have resulted from them.

Like everyone else involved in the tumultuous retail and health care markets, Albertsons and Rite Aid need to raise the level of their game. Walmart, Kroger and Aldi are investing heavily in the food sector. Walgreens is consolidating its expanded store network, adding services and honing operations, while CVS Health is looking to transform the entire health care system through its pending acquisition of Aetna.

And then there’s Amazon, whose e-commerce business and the response it has provoked from established retailers are shaking up almost every aspect of the marketplace.

Rite Aid and Albertsons are already grappling with those challenges, developing new digital capabilities and rethinking what today’s consumer wants from their stores.

The work goes on, but the task just became a lot tougher with the failure of the merger.



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