Earlier this morning drugstore company Rite Aid (RAD 2.15, +0.02 +1.2%) and supermarket chain Albertsons Companies announced an agreement whereby privately held Albertsons will merge with publicly traded Rite Aid. The deal brings shares of Albertsons back on the public markets after a few years of being privately owned by Cerberus Capital Management; Cerberus bought Albertsons in 2006, then merged it with Safeway in 2014 in a $9 billion deal.
Albertsons operates in about 35 states across the U.S. under such brands as Albertsons, Jewel Osco, Vons, Safeway, Shaw’s and Plated. Today’s news isn’t the first time Albertsons has attempted to come back to the public markets; in June of 2017, the acquisition of Whole Foods by Amazon (AMZN 1469.00, +20.31 +1.4%) thwarted the latest attempt by the company to re-enter the public markets. Plans for an IPO were also squashed in October of 2015 when industry giant Walmart (WMT 94.60, -10.18 -9.7%) released a tepid forecast which sent the stock on a markedly lower trajectory. Albertsons, at the time, postponed the IPO in order to give investors more time to analyze WMT’s outlook and see where Albertsons would land as a result.
It appears that Albertsons has finally struck the right chords with the Rite Aid deal. The terms are as follows:
- In exchange for every 10 shares of Rite Aid common stock, Rite Aid shareholders will have the right to elect to receive either
- (i) one share of Albertsons Companies common stock plus approximately $1.83 in cash or
- (ii) 1.079 shares of Albertsons Companies stock.
- Depending upon the results of cash elections, upon closing of the merger, shareholders of Rite Aid will own a 28.0% to 29.6% stake in the combined company, and current Albertsons Companies shareholders will own a 70.4% to 72.0% stake in the combined company on a fully diluted basis.
- Immediately following completion of the merger and assuming that all Rite Aid shareholders elect to receive shares plus cash, Albertsons Companies will have about 392.9 million shares outstanding on a pro forma and fully diluted basis.
- Following the close of the transaction and the share exchange, Albertsons Companies’ shares are expected to trade on the New York Stock Exchange.
The deal is backed by an investment consortium led by Cerberus Capital Management, which also includes Kimco Realty (KIM 15.38, +0.18 +1.2%), Klaff Realty LP, Lubert-Adler Partners LP, and Schottenstein Stores Corporation. Per the deal, Albertsons shareholders will be subject to a 180 day lock-up period following the merger.
The integrated company will operate about 4,900 locations, 4,350 pharmacy counters, and 320 clinics across 38 states and Washington, D.C., serving more than 40 million customers per week. Most Albertsons Companies pharmacies will be rebranded as Rite Aid, and the company will continue to operate Rite Aid stand-alone pharmacies.
Expected to close in the second half of the calendar year 2018, the combined company expects to deliver annual run-rate cost synergies of $375 million in about three years and access potential annual revenue opportunities of $3.6 billion. Further, on a pro forma basis the combined company is expected to generate year one revenues of about $83 billion (excluding potential revenue opportunities) and year one Adjusted Pro Forma EBITDA of about $3.7 billion (including run rate cost synergies). The combined company’s pro forma net leverage ratio is expected to be 3.8x at transaction close (including run rate cost synergies).
Albertsons scoops up what remains of Rite Aid (which recently sold about 2,000 stores to Walgreens Boot Alliance (WBA 70.75, -0.17 -0.2%) at a time when some of the largest pharmacy companies are in the midst of deals. A calendar week ago, the WSJ detailed a potential tie-up between Walgreens and healthcare provider AmerisourceBergen (ABC 99.57, +0.17 +0.2%). Further, peer CVS (CVS 70.60, -1.3%) announced a deal in early December whereby it would buy healthcare provider Aetna (AET 177.76, -0.75 -0.4%) for $207 per share.