Is the Rite Aid-Albertson’s Merger in Trouble?

Rite Aid has been an interesting tenant to follow over the last few years. Walgreens and Rite Aid entered into a merger agreement in October of 2015 before terminating the agreement in June of 2017 over mounting doubt the FTC would approve the action. Walgreens and Rite Aid announced a replacement to the deal whereby Walgreens would acquire 2,186 stores from Rite Aid for $5.175 billion. In September, this was amended to 1,932 locations at $4.375 billion. The agreement closed this past spring and all of the stores are expected by to fully integrated into Walgreens by the end of 2020.

In February of 2018, word broke that Albertson’s was going to acquire Rite Aid and also rebrand their in-store pharmacies under the Rite Aid name. The synergy of the grocer – pharmacy combination can provide both brands with a boost, better grocery options in Rite Aid locations and a larger and stronger network supporting the Albertson’s pharmacies.

The proposed merger has been met with mixed reactions. Rite Aid corporate is pushing for the deal and shareholders are pushing back. The outcome of the merger vote will be closely watched by Rite Aid property owners.

If the merger is approved:

An approved merger will mean more certainty for Rite Aid’s future. The last few years, Rite Aids have traded at a discount to other pharmacies because of high debt and pending mergers/sale agreements. With the sale of 1,900 locations to Walgreens in order to deleverage and removing any uncertainty about the future ownership of the company, Rite Aid properties would likely trade at a 50-100 bps discount to CVS and Walgreens. This range would be a return to the discount seen in Rite Aid properties before merger uncertainties caused their cap rates to spike. This spread between the Rite Aid cap rates and the rest of the net lease pharmacy sector will be driven by their different credit ratings.

If the merger is blocked:

Chris Komantinsky, an individual shareholder, has released an open letter outlining issues with the merger and urging other to vote against the merger. Komantinsky is trying to rally enough investors to halt a deal because he believes Albertson’s is undervaluing Rite Aid, currently RAD stock is trading below $2 per share.

With no merger Rite Aid would be able to sustain themselves as an independent company. They would likely remain a target for acquisition from other groups that have in-store pharmacies, looking to expand, or groups that are looking for an entry into the pharmacy market (Amazon). Rite Aid’s cap rates are likely to remain high as their future and possible future owner remains unknown.

Either way the vote goes, there will be some unique pharmacy assets in the net lease marketplace. Former Rite Aids undergoing a rebranding to Walgreens, with rental increases contained in the existing Rite Aid leases and now being guaranteed by Walgreens, will be interesting assets to follow as they hit the market. At the time of writing, Rite Aid has yet to set a date for the merger vote. As events unfold we will get a clear picture about the future of Rite Aid and the net lease pharmacy sector.

The views expressed here are the author’s own and not that of ALM Real Estate Media.