Call it “Plan C” for Rite Aid (NYSE:RAD).
Plan A was for Walgreens Boots Alliance (NASDAQ:WBA) to buy Rite Aid for $9.4 billion. That was a understanding announced in Oct 2015. However, a Federal Trade Commission (FTC) didn’t like that plan. As a result, the partnership agreement was modified to revoke a cost tab from $9 per share to between $6.50 and $7 per share, with adult to 1,200 shares being sole to Fred’s (NASDAQ:FRED). The FTC didn’t like that option, either.
So now Walgreens and Rite Aid have scrapped a merger deal. Instead, Walgreens skeleton to buy 2,186 of Rite Aid’s stores for roughly $5.2 billion in cash, with Fred’s being cut out of a picture. Where does this Plan C leave Rite Aid? Here’s a gloomy demeanour during what could be subsequent for a pharmacy retailer.
The bad news
There’s a lot of bad news for Rite Aid. The many apparent is that a batch took a shellacking, with shares plunging scarcely 30% after a proclamation that a merger wouldn’t happen. Rite Aid batch is now trade during a lowest turn given a center of 2013.
Rite Aid will also emerge from a latest agreement (assuming capitulation by a FTC) as a most smaller company. It will have significantly reduction income and income flow.
The misfortune thing about a distance being pared down is that Rite Aid contingency still contest opposite large pharmacy retailers like Walgreens. Lower volume from fewer stores could put Rite Aid during a waste in negotiating for prices. The association could also have reduction income to account new initiatives to sojourn rival with incomparable rivals.
The good news
However, there is some good news from a new deal. Most critical is that Rite Aid will be means to revoke a debt. As of Mar 4, 2017, a association had debt totaling $7.3 billion. Rite Aid CEO John Standley pronounced that a sale of a stores to Walgreens allows Rite Aid “to significantly revoke debt, ensuing in a clever change piece and softened financial coherence relocating forward.”
Rite Aid expects to use “a estimable majority” of a deduction from a Walgreens understanding to compensate down debt. Another certain is that it shouldn’t have to compensate most in sovereign taxes on a benefit from a sale, given a association will be means to mostly equivalent that benefit with a net handling detriment carry-forwards.
John Standley also thinks that Rite Aid will be means to boost a distinction margins after a sale to Walgreens is finalized. Part of this alleviation will branch from revoke seductiveness rate expense. In mercantile year 2017, Rite Aid spent scarcely $432 million in seductiveness expense. Its net income was hardly over $4 million, so pardon adult income from essential seductiveness will be outrageous for a company.
It’s also critical to know that Rite Aid is indeed removing some-more per store than it would have originally. With a latest deal, Walgreens will compensate Rite Aid scarcely $2.4 million per store. The 2015 agreement labelled Rite Aid’s stores during only over $2 million each.
What lies ahead?
There are dual perspectives about Rite Aid’s future. One is that a association will be a small shade of a former self after offered a stores to Walgreens. Under this view, Rite Aid faces dour prospects of competing opposite incomparable rivals.
The other take is that Rite Aid will be in improved position financially than it’s been in a prolonged time. Reduction of a seductiveness responsibility by obscure debt only competence concede turn some-more essential than a been in a while — even with fewer stores. If that happens, a stream batch cost could demeanour like a discount down a road.
There’s also a probability that a slimmed-down Rite Aid with reduction debt could be some-more appealing to other intensity acquirers. The probability that Amazon could be meddlesome has even been floated. we wouldn’t count on that, though who knows?
The understanding with Walgreens still isn’t a foregone end yet, given a FTC still has to give a thumbs-up. It also stays to be seen accurately how most Rite Aid will be means to condense a debt, how most a increase will unequivocally improve, and either it can be viable competitively. For now, investors are left especially with questions.