Albertsons in deal to fend off Amazon
US grocer to buy drugstore chain
US grocer Albertsons Cos Inc said on Tuesday that it would buy drugstore chain Rite Aid Corp to create a company with $83 billion in annual revenue, giving it more clout to compete with bigger chains in an industry fearing the entry of Amazon.com Inc.
The cash-and-stock deal is the latest in a wave of consolidation in the drug retailing sector, which is looking to cut costs amid weak reimbursement rates and lower generic drug prices. At the same time, Amazon’s foray is widely expected to disrupt the industry, prompting drugstore chains to beef up their businesses.
Backed by private equity firm Cerberus Capital Management, Albertsons hopes the deal will help it become a formidable competitor to CVS Health Corp and Walgreens Boots Alliance Inc, and give its private equity owners a way to exit their decade-long investment in the grocer.
Cerberus first took a stake in Albertsons in 2006 and scaled it through acquisitions including that of Safeway in 2014. It planned to sell its stake through an IPO in 2017, but dropped the plans after Amazon bought grocer Whole Foods Market in May.
“The new company will have an expanded footprint and be ranked first or second in 66% of the top metropolitan areas in the United States and will be ranked first or second in 70% of pharmacy locations,” Albertsons and Rite Aid said in a joint statement.
Albertsons owns about 2,300 supermarket stores mainly on the east and west coasts of the United States and also operates about 1,800 pharmacies. Rite Aid owns about 2,569 drug stores, after it sold 1,932 pharmacies to Walgreens for $4.38 billion.
Albertsons said it would convert its existing pharmacies to Rite Aid stores and let existing Rite Aid outlets operate as stand alone pharmacies.
Together, the combined company will operate about 4,350 pharmacy counters and 320 clinics across 38 states and Washington.
Within three years the combined company is expected to deliver annual runrate cost savings of $375 million, with more than 60% within the first two years, the companies said.
The combined company is expected to generate pre-tax earnings of about $3.7 billion within three years.
The deal follows Amazon’s move to team up with Berkshire Hathaway Inc and JPMorgan Chase & Co to form a not-forprofit company to provide health care for their employees, challenging the existing US health-care system.
The threat of Amazon making further inroads has jolted US drugstore chains into action after several years of declines in traffic and sales at front-end stores.
Larger rival CVS reached a $69 billion deal to buy insurer Aetna Inc last month, while Walgreens is also reported to have made a takeover approach for drug distributor AmerisourceBergen Corp.
“Drug retailing has had its own challenges with reimbursement pressure and weak front-end sales as evidenced in Rite-Aid’s weak profits over the last couple of years,” said Mickey Chadha, a vice president with credit ratings agency Moody’s Investors Service.
“Competing with much larger and more diversified drug retailers like CVS and Walgreens will be a formidable challenge,” he said.
“Based on the enterprise value of both Albertsons and Rite Aid, the combined company is valued at $24 billion,’’ an Albertsons Companies’ spokeswoman told Reuters.
Rite Aid shareholders can elect to get either one Albertsons common share plus about $1.83 in cash, or 1.079 Albertsons
common shares for every 10 shares they hold.
Shareholders of Rite Aid will own between 28 and 29.6% of the combined
company, while Albertsons’ shareholders will own the rest based on the elections.
“Depending on whether Rite Aid shareholders choose to be paid in cash and Albertsons stock or only stock, the deal values Rite Aid at between $1.30 and $2.65 per share,’’ Evercore ISI analyst Ross Muken said.