Albertsons as well as also Rite Aid’s message to investors: Size Still Matters

As Albertsons Cos. as well as also Rite Aid head to an August vote over their planned merger, the message to investors is actually simple: size still matters.

The deal, announced in February, could create a completely new retail giant valued at roughly $24 billion which could combine Albertsons’ grocery operations with Rite Aid’s pharmacy business. nevertheless with Rite Aid, investors likely to hold a roughly 29 percent stake inside completely new company, some have pushed back against the combination, pointing to Albertsons’ burdensome debt-load as well as also recent performance struggles.

Shares of the pharmacy chain have dropped roughly 24 percent since which announcing the deal.

To sway investors, the two retailers have embarked on a public relations campaign. Those efforts have centered, in part, on the benefits which scale gives them — even as shopping inside U.S. shifts online as well as also away by stores. The nation’s largest retailer, Walmart, has been doubling down on its grocery as well as also e-commerce investments. Competitor CVS Health has announced a $69 billion deal to merge with insurer Aetna.

Increased size gives increased ability to bargain with food as well as also consumer companies as retailers focus on competing on cost. which could also give Albertsons as well as also Rite Aid a greater ability to find $375 million in cost-savings which could help the two invest in necessary technology for the future, the companies argue. The two could have a particularly large presence on the East as well as also West coasts.

“Scale is actually big here,” Albertsons Chief Operating Officer Jim Donald said in an interview. “Scale is actually what we can use as we continue to [serve] customers online as well as also [in] brick as well as also mortar.”

Albertsons is actually also pushing back against critiques of its performance. The grocer earlier which week reported adjusted earnings before interest tax depreciation as well as also amortization (EBITDA) of $816 million a 5.7 percent jump over the same quarter last year.

Albertsons was formed by Cerberus as well as also a consortium of investors in 2006. The investment firm later merged Albertsons with the grocer Safeway in 2015. nevertheless plans to take Albertsons public were sidelined by market volatility as well as also, later, Amazon’s acquisition of Whole Foods which upended the grocery market.

Rite Aid had its own plans blocked. Regulators thwarted its attempts to sell to Walgreens Boots Alliance, whittling a down a sale of its entire 4,0 footprint to just 1,932 stores.

nevertheless along with scale, Albertsons has about $12 billion in long-term debt as well as also capitalized leases. The deal also gives Cerberus an opportunity to finally bring Albertsons into the public market after owning the company for more than a decade.

“The proposed transaction is actually inside best interests of Albertsons as well as also Rite Aid management, nevertheless not Rite Aid shareholders,” Highfields Capital Management, which owns 4.4 percent of Rite Aid’s shares, said in announcing last month which which plans to vote against the deal.

Even with scale as well as also Albertsons’ enhanced performance, the challenges are robust.

Amazon’s acquisition of Whole Foods as well as also planned acquisition of Pill Pack bring the Seattle giant’s might to both the grocery as well as also pharmacy business. Kroger has struck numerous deals as well as also partnerships to augment its e-commerce business as well as also has its own pharmacy business. Walmart’s investments in technology as well as also cost threaten to undercut any retailer which sits between them as well as also Amazon-backed specialty grocer Whole Foods.

“They [Walmart] are inside 800 pound guy in our industry,” acknowledged Donald.

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