Berko: Three years after buying Rite Aid stock, questions

Dear Mr. Berko: I bought Rite Aid stock at $6 in 2015, thinking the rumored buyout by Walgreens would give me a nice short-term profit. Could you explain to me what happened to the stock? Does Albertsons or Walgreens own Rite Aid? Do you think I will ever break even?

— H.L., Oklahoma City

Dear H.L.: Albertsons, a large nonpublic grocery chain, recently announced that it plans to acquire the Rite Aid (RAD-$1.69) stores that haven’t been sold to Walgreens, and the deal really “sphinx.” The announcement ended a 30-month fight by Walgreens Boots Alliance (WBA-$64), which originally attempted to purchase all of RAD’s stores for $17 billion in October 2015. The starry-eyed, Harvard-educated antitrust boys in Washington nixed that deal. In June 2017, WBA tried again to acquire all of RAD’s stores — this time for $9.3 billion. Still, the government’s antitrust kids put the kibosh on the deal. Then WBA offered to buy half of RAD’s locations for $5.6 billion, but the antitrust geeks in Washington hosed the deal again. WBA finally purchased 1,932 Rite Aid locations in September 2017 for $4.4 billion. And WBA’s management plans to close 635 stores that aren’t worth a box of used paper clips.

Today there are 2,670 RAD locations remaining, and if shareholders were to reject the Albertsons deal, this streamlined business would probably allow RAD to return to the black in fiscal 2018. The top line for RAD stores is expected to trend lower because of the lower store base, but management is considering using the proceeds from the sale to WBA to pay off debt and lower interest costs. RAD stores could be on the road to profitability, and Value Line has a $5 price projection. Earnings are expected to be 3 cents a share this year. Some observers and shareholders feel there would be hope on the horizon if RAD ignored Albertsons and remained public with 2,670 stores.

However, RAD’s chairman and his executive committee don’t see it that way, and Albertsons plans to pay $2.6 billion, or just under $1 million per store, to acquire the remaining stores. WBA paid $2.3 million per location. Something’s rotten in Denmark. But considering the previous brouhahas plus the ifs, ands and buts over the past few years, RAD’s stockholders have to be suffering from shareholder’s fatigue. In April 2017, RAD was trading at $6 a share, and shareholders were in a blue funk. Now, after nearly 30 months of tumult, some shareholders don’t give a hoot that the Albertsons offer is really stinky.

Not convinced

For every 10 shares of RAD, the RAD shareholder would get one share of Albertsons, which would go public after the deal, plus $1.83 in cash. ABS would begin trading at $23 if the deal were to be completed. So every 10 shares of RAD would be worth $24.83, meaning each share would be worth about $2.48. But I’m not convinced that Albertsons is worth $23 a share. Even though the acquisition would bring in $390 million in synergies, even though the acquisition would include RAD’s EnvisionRx pharmacy benefit manager, even though that PBM would include 285,000 Albertsons employees, even though 2,670 new locations could leverage lower drug costs and even though traffic at RAD stores could improve Albertsons’ grocery revenues, I think Albertsons’ stock would trade between $14 and $17 a share. Grocery revenues are in the doghouse and declining. Last year, Kroger — the largest U.S. food retailer, with $110 billion in revenues — watched revenues fall by 20 percent, and the revenues of regional supermarkets had even steeper declines. Meanwhile, Albertsons’ net profit margins (estimated at 0.9 percent) are very concerning in an industry in which the average net profit margins are 1.5 percent.

Albertsons would have to trade at $60 for you to receive the $6,000 you paid for 1,000 shares of RAD. I think you’d have a better chance of breaking even if shareholders rejected the Albertsons deal and new management took over the remaining 2,670 Rite Aid locations.

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