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Albertsons Eyes Higher-Spending Shoppers in Rite Aid Deal

Merger could create a food and wellness powerhouse, but some observers are cautious

Officials of Albertsons and Rite Aid laid out a case for building on one another's strengths to create a retail powerhouse in food, health and wellness, while providing financial benefits that could also transform them.

The deal, announced early Tuesday, would combine the 2,323-store supermarket retailer based in Boise, Idaho, with the remaining 2,569-unit drug chain based in Camp Hill, Pa., by means of a stock swap that would allow current Albertsons shareholders to control approximately 72% of the combined entity, which would trade publicly on the New York Stock Exchange.

The companies said the deal, expected to close in the second half of the calendar year, would unleash $375 million in annual run-rate synergies while attracting higher-spending and more loyal customers. The deal will also provide merchandising opportunities that would, for instance, build Rite Aid’s front-end sales with additional grocery, as well as bolster health, wellness and general merchandise sales in Albertsons stores, primarily through one another’s private brands.

“Both companies are entirely customer-centric, and we’re both constantly looking for ways we can give customers what they want in the most convenient ways possible,” said Kermit Crawford, president and COO of Rite Aid, in a conference call with analysts. “When you look at these companies, we believe Rite Aid and Albertsons are a natural fit that will extend and enable each other’s strategy and value proposition.”

The deal continues a long line of acquisitions that grew Albertsons from a collection of stores unwanted when its predecessor company sold its American Stores units to Supervalu in 2006. Backed by Cerberus Capital and real estate entities such as Kimco, the group subsequently reunited the American Stores assets once sold to Supervalu, acquired its larger rival Safeway, and made deals for companies such as Plated, United Supermarkets and more.

“This is one of the biggest strokes of genius in retail in the last 25 years,” Burt P. Flickinger III, managing director of Strategic Resource Group, told WGB

Flickinger says that Bob Miller—Albertsons' current CEO, who will serve the combined companies as chairman—was a former Rite Aid CEO and knows the company’s strengths, including front-end sales and choice locations in desirable markets in the Northeast and West Coast. John Standley, the Rite Aid CEO who will serve the combined company’s CEO, also has grocery experience with Pathmark.

Standley in a presentation said that the combination could provide the grocery chain with access to higher-spending customers, saying Albertsons shoppers who buy both grocery and prescriptions typically spend 2.5 times more per week than those customers who don’t purchase prescriptions.

The companies said they have identified revenue opportunities of $3.6 billion through leveraging front-end capabilities and pharmacy expertise, as well as rebranding Albertsons pharmacies in most markets to the Rite Aid name. Miller said Albertsons could also look to grow the number of stores that include pharmacies, while Standley said the deal could also provide Rite Aid with geographic cover to build new stores “that we would never have without Albertsons.”

Some observers sounded notes of caution. Both companies currently carry considerable debt, though they projected the net debt to EBITDA figures would drop from current levels of 4.5 times and 4 times for Rite Aid and Albertsons, respectively, to 3.8 times as a combined unit, and are projecting synergies and revenue growth could cut that ratio by 2.75 times in three years.

“This brings together two retailers that have struggled to thrive in a highly competitive retail landscape independently,” said Diana Sheehan, director of research and insights at Kantar Consulting. Both Rite-Aid and Albertsons reported in January that they saw comp store declines in Q3 2017, while competitors were showing positive comps. With the right strategy, they can turn the ship around together, but there is significant risk.”

Sheehan also said the deal could add complexity to an Albertsons organization already busy on multiple fronts, including expansion of its e-commerce, as it shifts to the Safeway operating system.

“While the alliance of Albertsons and Rite-Aid is very logical, this acquisition happening now adds increasing complexity to an organization that is already quite complex,” she said. “With multiple divisions, expansion into home delivery, and now the addition of the Rite-Aid ecosystem, vendors will need clear and realistic communication and expectations set to drive true efficiency and optimized spending.”

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