By Heather Haddon
Albertsons Cos. plans to buy the rest of Rite Aid Corp. that
isn't being sold to Walgreens Boots Alliance Inc. as retailers of
all stripes scramble to respond to a rapidly changing consumer
shopping landscape.
The drugstore chain and Albertsons have a combined value of
around $24 billion, including debt, the companies said Monday. Rite
Aid, which comprises thousands of drugstores and a
benefits-management company with millions of members, has a market
value of about $2.3 billion and is in the process of selling a
chunk of its stores to Walgreens.
Following the proposed cash-and-stock deal, shareholders of
closely held Albertsons, owner of Safeway and 19 other supermarket
chains, would hold roughly 71% of the combined company, while Rite
Aid investors would own the rest, they said.
The transaction would create a company with revenue of $83
billion and allow Albertsons to go public after more than a decade
of ownership by private-equity giant Cerberus Capital Management
LP. The grocer was on the brink of an initial public offering in
2015 but shelved the plan in the face of a dour profit forecast by
rival Walmart Inc.
Investors reacted positively to the news Tuesday, with Rite Aid
shooting up 26% in premarket trading before coming down to a 2%
bump in recent trading. Other retail stocks sank on Walmart Inc.'s
disappointing earnings Tuesday morning. Rite Aid was the most
actively traded stock on the New York Stock Exchange as of midday
Tuesday, with trading of more than 110 million shares roughly fives
times the chain's 30-day average.
In a call to investors Tuesday, Rite Aid and Albertsons
executives said the combined companies would see a financial boost
from $375 million of expected cost savings a year. They expected
earnings before expenses to come in at nearly $4 billion, with new
revenue streams coming from Rite Aid customers having access to
Albertsons stores and services, and vice versa.
"We just think there's a huge opportunity," Rite Aid Chief
Executive John Standley told investors. Shareholders must still
sign off on the deal.
For Rite Aid, the third-largest U.S. drugstore chain, the deal
represents another way to gain heft after the federal government
blocked its full sale to Walgreens, which now plans to buy roughly
2,000 of Rite Aid's stores.
The chief executives of the companies said in interviews Monday
that the merger is the best way for them to compete in businesses
increasingly threatened by Amazon.com Inc., along with an
emboldened Walmart.
Amazon is making a big push into food retail with its purchase
of Whole Foods Market Inc. Walmart, in turn, has boosted its
e-commerce offerings and the range of goods it sells, through a
number of recent deals.
"We know that scale matters," said Bob Miller, Albertsons chief
executive. "We continue to grow to compete with all competitors,
not just Amazon."
Mr. Standley said the merger will help the company expand its
food offerings to stand out from CVS Health Corp., Walgreens and
Walmart. It will also expand Rite Aid's e-commerce offerings given
Albertsons' progress in that realm, said Mr. Standley, 54 years
old.
"There is a ton of potential here," he said.
All three of the U.S.'s biggest pharmacy chains are now pursuing
deals in a sign of the threats they face as customers increasingly
shop online. CVS has agreed to buy health insurer Aetna Inc. , and
Walgreens, in addition to the scaled-back Rite Aid deal, is in
talks to buy drug distributor AmerisourceBergen Corp. , The Wall
Street Journal recently reported.
The S&P index for drug retail has fallen 11% in the past
year.
Mr. Standley is to serve as the new company's CEO, while Mr.
Miller would act as chairman. Speculation as to who would succeed
the 73-year-old Albertsons CEO had mounted in recent years.
"The truth is I'd like to work forever; I love what I do, but
I'm going to be 74 in a month," Mr. Miller said.
The new company, to be based in both Boise, Idaho, and Camp
Hill, Pa., would operate approximately 4,900 stores and 4,300
pharmacies across 38 states and Washington, D.C., with a heavy
presence along the coasts. The company's new name is to be
determined upon the deal's close, expected by the summer, the
companies said.
Amazon's further push into grocery has caused supermarket stocks
to tumble and prompted food retailers to search for deals in a
sector known for razor-thin profits. A historic drop in food costs
also hurt sales last year when it sparked a price war among
grocers.
The executives said Monday that the merger will boost food and
pharmacy delivery options for customers and help drive repeat
sales.
Supermarket shoppers tend to spend more and be more loyal when
they shop for prescriptions along with food, the executives
said.
Albertsons, owner of roughly 2,300 stores, had made a series of
technology plays as sales in physical stores have softened. The
company acquired the Plated meal-kit service last year, and is in
the process of offering the popular boxes of premeasured
ingredients to millions of store customers.
Albertsons reported disappointing sales last month. Executives
at the time said they expect improvements this year and to slow
new-store development to focus on technology investments.
Mr. Miller said the company hadn't closed the door on an IPO
when the merger discussions began, but that the Rite Aid deal
offers more benefits for shareholders and customers.
"This is more about a combination of two great companies that
will create great value and grow sales, not just about being a
public company, " he said.
The federal government will have to approve the deal. Albertsons
and Rite Aid operate in many of the same markets, but have less
sector overlap than Walgreens and Rite Aid, the companies said.
Rite Aid today does sell food, and Albertsons operates pharmacies
in its stores.
Mr. Standley said the company has sought to learn from the
failed Walgreens deal, and that it believes the merger wouldn't
stifle competition.
Write to Heather Haddon at heather.haddon@wsj.com
(END) Dow Jones Newswires
February 20, 2018 13:38 ET (18:38 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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