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Should Rite Aid Shareholders Take the Cash or Only Stock With the Albertsons Merger?

By Keith Speights - Feb 21, 2018 at 7:33AM

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It's about to be decision time for Rite Aid investors. But which is the better choice?

It didn't take a Nostradamus to predict that Rite Aid (RAD 7.95%) would be acquired. In November, I speculated about where it would be in five years. My view was that an acquisition of the pharmacy chain was likely. Of course, anyone could look at its valuation and think that some company would probably be interested in buying it at some point. But I had no idea just how quickly that scenario would actually happen.

On Tuesday, Rite Aid announced that it was merging with privately held Albertsons Companies. With the deal, current Albertsons shareholders will own over 70% of the combined company, with current Rite Aid shareholders owning the rest. But if you're a Rite Aid shareholder, you have a decision to make about exactly how much of the combined company you'll own.

You can take some cash in addition to Albertsons stock in exchange for your Rite Aid stock. Or you can swap your Rite Aid stock for only Albertsons stock, with no cash. Which is the better choice for current Rite Aid shareholders? Here are the arguments for both alternatives. 

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Image source: Getty Images.

Take some cash

Current Rite Aid shareholders could choose to exchange 10 shares of Rite Aid for one share of Albertsons stock plus receive around $1.83 in cash. The cash portion of this alternative reflects roughly 8.6% of Rite Aid's closing price of $2.13 per share prior to the announcement of the merger. 

Why might this option make sense? If you think the combined company isn't likely to succeed, it's better to take the cash now. One reason to doubt the chances of the Albertsons-Rite Aid merger to succeed is the track record of both companies.

Rite Aid has struggled in competing against its larger rivals in recent years. The company's bottom line has deteriorated significantly. Rite Aid also took on a lot of debt. When Walgreens Boots Alliance (WBA 1.86%) announced plans in 2015 to acquire Rite Aid, it was viewed as a great move for the latter's shareholders.

However, the Walgreens acquisition of Rite Aid faced opposition from the Federal Trade Commission and was ultimately scrapped. Instead, Walgreens opted to buy nearly 2,000 of Rite Aid's stores. This deal left Rite Aid with less debt, but the company is also much smaller than it was before. 

Albertsons also has experienced similar struggles as Rite Aid. Albertsons' debt swelled as it made acquisition after acquisition. The grocer also faced increased competition. As a result, Albertsons was carved up and sold to a consortium of companies in 2006. Since then, additional acquisitions helped Albertsons increase in size. The company is now the second-largest grocery chain in the U.S. However, it continues to face significant competition.

One emerging competitor that both Rite Aid and Albertsons must contend with is (AMZN 3.58%). Last year, Amazon acquired Whole Foods and competes directly against big grocery stores like Albertsons. Amazon appears to be preparing to move into the retail pharmacy business, which would pit it against Rite Aid and other large pharmacy chains. 

Bet on the new company

Here's the other alternative: You could exchange every 10 shares of Rite Aid stock you own for 1.079 shares of Albertsons stock. This option doesn't give you any cash but does give you a larger stake in the new company emerging from the merger between Albertsons and Rite Aid. Making this choice is a bet on the new company. But is it a good bet? Maybe so.

The combined company will include around 4,900 locations, 4,350 pharmacy counters, and 320 clinics across 38 states and Washington, D.C. Most of the current Albertsons pharmacies will be rebranded under the Rite Aid name. And the shares of the combined company are expected to trade on the New York Stock Exchange.

Out of the gate, the combined company should generate annual revenue of $83 billion and adjusted EBITDA of around $3.7 billion. Its retail locations will be ranked first or second in nearly two-thirds of the top metropolitan areas in the U.S. 

In addition, there are projected annual run-rate cost synergies of $375 million to be obtained through the merger, which should help the combined company to be more competitive. These synergies are expected to be realized from procurement savings, a combined supply chain, combined distribution and fulfillment channels, and leveraging manufacturing capabilities.

One of the key concerns about Rite Aid after selling off the big chunk of stores to Walgreens was that it might be too small to compete effectively. The merger with Albertsons changes that dynamic. There will be nearly as many Rite Aid stores after the merger with Albertsons is finalized as there were before Rite Aid sold off a large number of its stores to Walgreens. 

A pragmatic decision

I think that Amazon will absolutely be a formidable competitor in both grocery and pharmacy markets. Other companies, including Walgreens, are also formidable competitors. However, the merger of Albertsons and Rite Aid will create a combined company better positioned to battle these rivals than the individual companies would be standing alone.

But is betting on the new company a better choice for Rite Aid shareholders than taking some cash? If I owned Rite Aid stock, I'd take the cash and use it to invest in a stock with solid growth prospects. What about the stock in the new company in the new company that I'd own after swapping my Rite Aid shares? I'd probably sell some of it. However, I might hold on to some shares just to see what could happen down the road.

This isn't the kind of acquisition deal that many Rite Aid shareholders were hoping for. It's not exactly what I expected, either. But it is what it is. My view is to make the most of it, which means taking the relatively small amount of cash being offered and put it to better use. 

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Stocks Mentioned

Rite Aid Corporation Stock Quote
Rite Aid Corporation
$8.69 (7.95%) $0.64, Inc. Stock Quote, Inc.
$116.46 (3.58%) $4.02
Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
$41.65 (1.86%) $0.76

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