Last updated on February 21st, 2018
Albertsons Cos. and drugstore chain Rite Aid Corp. have entered into a definitive merger agreement under which privately held Albertsons Cos. will merge with publicly traded Rite Aid.
Current Rite Aid Chairman and CEO John Standley will become CEO of the combined company, with current Albertsons Cos. Chairman and CEO Bob Miller serving as chairman. The combined company is expected to be comprised of leadership from both companies and will be dual headquartered in Boise, Idaho, and Camp Hill, Pennsylvania. The name of the combined company will be determined by transaction close.
The integrated company will operate approximately 4,900 locations, 4,350 pharmacy counters, and 320 clinics across 38 states and Washington D.C., serving 40-plus million customers per week. Most Albertsons Cos. pharmacies will be rebranded as Rite Aid, and the company will continue to operate Rite Aid stand-alone pharmacies.
The transaction has been approved unanimously by the boards of directors of both companies. The merger is expected to close early in the second half of calendar year 2018, subject to the approval of Rite Aid’s shareholders, regulatory approvals and other customary closing conditions.
Under the terms of the agreement, in exchange for every 10 shares of Rite Aid common stock, Rite Aid shareholders will have the right to elect to receive either one share of Albertsons Cos. common stock plus approximately $1.83 in cash, or 1.079 shares of Albertsons Cos. stock. Depending upon the results of cash elections, upon closing of the merger, shareholders of Rite Aid will own a 28 percent to 29.6 percent stake in the combined company, and current Albertsons Cos. shareholders will own a 70.4 percent to 72.0 percent 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 Cos. will have approximately 392.9 million shares outstanding on a pro forma and fully diluted basis. Following the close of the transaction and the share exchange, Albertsons Cos.’ shares are expected to trade on the New York Stock Exchange.
Integrated platform to offer ‘greater choice, convenience and access’
The companies say the combination will provide customers with flexible and convenient access to a full range of food, health and wellness offerings and will deliver significant value to customers, employees and shareholders by:
- Enhancing the companies’ geographic footprint and creating local networks in attractive geographies. The new company will have an expanded footprint and be ranked first or second in 66 percent of the top metropolitan areas in the U.S. and will be ranked first or second in 70 percent of pharmacy locations based on Nielsen data. It will establish the leading integrated food, health and wellness retailer on the West Coast and will have a strong brand position in the Northeast.
- Leveraging strong pharmacy network and rite aid’s pharmacy benefit management company, EnvisionRxOptions, to drive customer growth. The combined company will be positioned to drive incremental growth by deepening existing relationships and expanding reach across higher-value pharmacy customers. This will be achieved through a full suite of health and wellness capabilities, including specialty pharmacy offerings and in-store RediClinics in larger Albertsons Cos. stores and stand-alone Rite Aids. In addition, investing in preferred relationships with EnvisionRxOptions, other PBMs, and regional payors is expected to drive prescription growth.
- Utilizing data analytics and integrated loyalty programs to drive growth and target new customers. The new company will capitalize on enhanced data and analytics to unlock profitable growth through new customer acquisition, new merchandising programs and demand forecasting. It will also create cross-branded opportunities for its loyalty programs, improving connections across a combined current base of 25 million active loyalty program participants.
- Combining strong own-brand portfolios with extensive manufacturing and distribution network to drive revenue growth and operating efficiencies. The combination of Albertsons Cos.’ billion dollar own brands, including O Organics and Lucerneâ, and its manufacturing and operating capabilities, with Rite Aid’s own brands in health and wellness, including B4Yä and Daylogicä, and its pharmacy expertise will allow the combined company to drive growth opportunities and efficiencies across its purchasing, marketing, manufacturing and merchandising functions.
- Serving customers when, where, and how they want to shop. The combined company’s expanding omni-channel platform will provide customers with convenience, choice and flexibility through multiple in-store formats, digital channels and same-day food and prescription delivery options from stores and via Drive Up & Go.
“This powerful combination enables us to become a truly differentiated leader in delivering value, choice and flexibility to meet customers’ evolving food, health and wellness needs,” said Standley. “The combined platform positions Rite Aid to capitalize on our pharmacy expertise and expand and enhance our pharmacy footprint. We are confident that delivering improved customer experiences and value will drive growth and profitability while creating compelling long-term value for shareholders.”
“The hallmark of Albertsons Companies’ business has been to become the favorite local supermarket of our customers,” said Miller. “We have always put our customers first, and our combination with Rite Aid will enable us to even better serve the valuable pharmacy customer by providing a fully integrated one-stop-shop for our customers’ food, health and wellness needs. I have long known the excellent management team at Rite Aid, and we share a singular focus on superior customer service and a clear vision and strategy to become the favorite local supermarket and pharmacy to shoppers in every neighborhood we serve.”
Lenard Tessler, vice chairman and senior managing director at Cerberus, commented, “As a long-term partner to Albertsons Companies’ world-class management team, this transaction highlights Cerberus’s confidence in this team and our conviction in the underlying customer focus driving this combination. As significant shareholders, we are very optimistic about the future of the combined company.”
Financial details
The combined business will benefit from an enhanced financial profile and solid capital structure, which will support growth and expansion. On a pro forma basis, the combined company is expected to generate year one revenues of approximately $83 billion (excluding potential revenue opportunities) and year one Adjusted Pro Forma EBITDA of approximately $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).
The combined company expects to deliver annual run-rate cost synergies of $375 million in approximately three years and access potential annual revenue opportunities of $3.6 billion. More than 60 percent of the cost synergies are expected to be realized within the first two years post-close. Identified revenue opportunities primarily include partnering with payors, including Rite Aid’s PBM, EnvisionRx, through preferred networks to drive additional high-value customers, connecting Rite Aid’s reliable pharmacy customer base to Albertsons Cos. through loyalty programs and targeted marketing, leveraging Albertsons Cos.’ grocery capabilities and Rite Aid’s pharmacy expertise to enhance the customer offering, and driving traffic through the omni-channel experience. Cost synergies will be achieved primarily through procurement savings, leveraging efficiencies realized by a combined supply chain, combined distribution and fulfillment channels, and leveraging manufacturing capabilities.
Governance
The board of directors will be comprised of nine directors, four of whom will be named by Albertsons Cos. (including Bob Miller and Lenard Tessler), four of whom will be named by Rite Aid (including John Standley), and one of whom will be a jointly selected director. A majority of the board will be independent. Tessler will serve as lead director.
Rite Aid aims to become ‘differentiated leader in food, health and wellness’
This morning, Rite Aid sent out a letter to its employees announcing the agreement. In the letter, Standley and Kermit Crawford, Rite Aid president and COO, outline the deal and some of the motivations behind it. See the letter in its entirety here:
Dear Rite Aid Team,
As you know, we have been working diligently as a team to provide an outstanding experience for our customers while also identifying ways to build momentum as an organization. Today, we are excited to share some important news that will make the “new” Rite Aid part of a leading food, health and wellness company with expanded capabilities to serve customers where and how they want to shop.
This morning, we announced that Rite Aid and Albertsons Companies, one of the nation’s largest grocery retailers, have entered into a merger agreement to combine our complementary businesses and create a truly unique enterprise that operates approximately 4,900 locations, including 4,300 pharmacies and 300 clinics.
For Rite Aid, this merger is transformational because it takes us from being a strong regional pharmacy player and combines us with the number two conventional grocer in the country to create what we believe will be the differentiated leader in food, health and wellness. We will be an important part of a company with projected annual revenue of $83 billion and will rank first or second in most of the markets in which we operate. It will also provide us with 1,800 additional pharmacy counters and access to Albertsons’ expertise in food and consumables, including their extensive own brands portfolio and food manufacturing capabilities that will help us in further transforming the front-end of our stores. The new company will be financially stronger than we are today and will generate significant cash flow to reinvest in the business.
In addition, the associates at Albertsons, which operates 20 well-known banners like Safeway, Shaws and Jewel-Osco, are ideal partners because they share our vision for providing an outstanding customer experience.
As we bring Albertsons and Rite Aid together, John will be leading the combined organization as CEO. Albertsons’s current Chairman and CEO Bob Miller will serve as Chairman. The company’s board of directors will include four directors named by Rite Aid, four directors named by Albertsons and one jointly appointed independent director. The company will be dual headquartered in Boise, Idaho, and Camp Hill, Pa., and is expected to trade on the New York Stock Exchange.
Over the past several years, your focus and commitment have enabled us to transform our company through initiatives such as our wellness+ loyalty program and expanded clinical services like our highly successful flu shot program. It’s even more impressive that we have continued this transformation during a time of significant change for our organization and a period of strong competition within our industry.
As a leadership team, we’re constantly exploring options to find the best way forward, and we believe this proposed combination gives us an unprecedented opportunity to further transform the retail and healthcare landscape while accelerating our strategy for the “new” Rite Aid. Most Albertsons pharmacies will be rebranded as Rite Aid, and we will continue to operate Rite Aid stand-alone pharmacies, creating a network that ranks first or second in 70% of our pharmacy locations.
In addition to utilizing our existing pharmacy network, our EnvisionRxOptions PBM will be critical in enabling us to generate additional traffic in our combined store networks, and RediClinic and Health Dialog will continue to serve as important offerings in meeting the health and wellness needs of our patients. Together with Albertsons, we will have greater resources like the ability to leverage our loyalty programs to drive cross-traffic between grocery and pharmacy locations and gain enhanced customer insights.
Under the financial terms of the agreement, in exchange for every 10 Rite Aid shares, Rite Aid shareholders will have the right to elect to receive either one share of the combined company and $1.83 in cash or 1.079 shares of the combined company. The merger, which does not affect the transfer of stores to Walgreens Boots Alliance or the support we have agreed to provide to Walgreens-owned Rite Aid branded stores, is expected to close in the second half of calendar 2018. Until then, Albertsons and Rite Aid will continue to operate as separate companies. The transaction is also subject to approval by Rite Aid shareholders, regulatory agencies and other customary closing conditions.
This is certainly a lot of information to process, and we understand that today’s announcement will generate a number of questions. We encourage you to read the press release below for additional information about the transaction. In addition to holding team meetings throughout our organization over the next few days, we will be sharing more information with you in the coming weeks and months.
This proposed combination is an exciting opportunity to create a truly differentiated leader in the food, health and wellness space. As we look to make the most of this opportunity, the most important thing we can do is to continue supporting each other in effectively serving our customers, who rely on us every day to meet their health, wellness and shopping needs.
We have an extraordinary team with a proven ability to deliver a great Rite Aid experience, which should give us tremendous confidence that we can continue to drive positive momentum throughout our business in the weeks and months ahead. Thanks for all of the great work you do each and every day in making Rite Aid a trusted destination for health and wellness. We look forward to working together in taking these efforts to an even higher level heading forward.
