Now that the merger between pharmacy chain Rite Aid and grocery store Albertsons has been called off, both companies — but especially Rite Aid — face uncertain futures in a volatile business landscape relentlessly sinking retailers. But it wasn't clear that their combination would have ensured long-term viability in any case.
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"The proposed merger by Albertsons and Rite Aid was always one based on an overly optimistic view that combining the two businesses would generate incremental revenue and profit," GlobalData Retail Managing Director Neil Saunders wrote in Chain Store Age.
Naturally, the would-be merger participants disagreed with that assessment. "Albertsons Companies believes that the strategic rationale of the Rite Aid combination was compelling, including the $375M of cost synergies and $3.6B of identified revenue opportunities," Boise-based Albertsons said in its statement announcing the calling off of the merger.
"We disagree with the conclusion of certain Rite Aid stockholders and third-party advisory firms that although they acknowledged the strategic logic of the combination, did not believe that Albertsons Companies was offering sufficient merger consideration to Rite Aid stockholders."
Opposition by Rite Aid shareholders helped kill the deal. One of their objections was that shareholders wouldn't receive a large enough share of the merged company.
Many Rite Aid shareholders said they suspected the sale to Albertsons would enable the grocer’s largest investors — such as private equity firm Cerberus — to cash out, Forbes reports.
Fitch Ratings affirmed its negative outlook for Rite Aid after the deal was terminated.
"Drug retail is experiencing intensifying competition from direct and indirect competitors," Fitch said. "Players are [contemplating] business combinations ... to reduce costs and strengthen customer connections. The Rite Aid/Albertsons combination was similarly intended to improve customer relationships while yielding scale benefits in purchasing and back-office expenses."
Recent mergers in the grocery and pharmacy business might threaten the viability of relatively small chains like Rite Aid. CVS Health Corp.'s bid to purchase Aetna Inc., for instance, would create the second-largest U.S. company in revenue, behind only Walmart. That deal might close as soon as this quarter, as regulatory approval nears.
Camp Hill, Pennsylvania-based Rite Aid has about 2,600 locations, after selling over 1,900 of them to Walgreens last year, making its footprint far smaller than Walgreens or CVS. Albertsons has about 2,300 stores.
“The termination of the merger with Albertsons leaves Rite-Aid at a big disadvantage as it neither has the scale nor the balance sheet to compete with much larger and well-capitalized rivals," Moody's Vice President Mickey Chadha told MarketWatch.
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