Albertsons Cos. and Rite Aid have called off their $24 billion megamerger in the wake of investor criticism, leaving both companies wondering what’s next. The announcement came the evening before a shareholder vote on the deal scheduled for Aug. 9, 2018.
The grocery giant, which operates more than 2,300 stores across 20+ banners including Albertsons, Safeway, Jewel-Osco, Acme and Shaw’s, initially sought to expand into pharmacy and attract new consumers who regularly buy OTC and prescription drugs. The goal was to increase overall foot traffic and help the company scale up to fight off competition from major grocery players such as Walmart, Kroger and Ahold Delhaize.
In July, two investor advisory firms, Glass Lewis and ISS, spoke out against the deal, noting that it was dangerous for two high-debt, low-margin businesses to merge. Another criticism was that the deal provided Albertsons’ private equity owner, Cerberus Capital Management, with a vehicle to take the company public without rewarding Rite Aid shareholders in turn. The merger didn’t make sense for either party, said Neil Saunders, Managing Director at GlobalData Retail.
“The idea of creating a food, health, and wellness giant was always fanciful,” said Saunders in a research note. “Neither Albertsons nor Rite Aid are stellar retailers. The former has a tired and shabby store portfolio that is in desperate need of investment, while the latter also has a retail proposition that is far from cutting edge. In our view, Albertsons should focus on investing in and boosting its existing business rather than getting involved in corporate deals. The deal was simply an acquisition that would have added some new revenue to Albertsons while injecting another entity into an already overly-complex corporate structure.”
Despite an anticipated $375 million in cost savings over the next three years and $3.6 billion in identified revenue opportunities for both companies, investors and shareholder advisory firms alike were unsure whether the merger would sufficiently cure either retailer of their current woes.
The Federal Trade Commission (FTC) had already blocked Rite Aid from merging with rival Walgreens, settling instead for selling 1,932 locations for $4.4 billion. Now that Walgreens is significantly larger and the proposed CVS Health-Aetna merger hangs in the balance, Rite Aid’s biggest competitors dwarf the company in size and resources. Earlier this week, the company cut its 2019 guidance, citing pressure from generic-drug makers.
On the Albertsons side, the grocer launched a digital platform designed to give CPG brands access to shopper data in January to help them deliver targeted ad campaigns, entered a partnership with Instacart and acquired meal kit provider Plated in September 2017. But despite these moves, the company’s supermarket banners haven’t found a way to stand out against their peers, particularly when it comes to the in-store experience. The retailer will need to upgrade its grocery offerings, improve its buy online/pick up in-store functionalities and focus on data-driven shelf optimization if it wants to position itself with other innovative grocers.
“The termination of the merger with Albertsons leaves Rite Aid at a big disadvantage as it neither has the scale nor the balance sheet to compete with much larger and well capitalized rivals like CVS and Walgreens,” said Moody’s Vice President Mickey Chadha in commentary provided to Retail TouchPoints. “Although the termination is also a big blow to Albertsons’ long desired goal to go public, it is in a better competitive position in the supermarket space than Rite Aid is in the retail pharmacy sector.”