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How Will Rite Aid Be Impacted by Albertsons Deal Termination?

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Rite Aid Corporation (RAD - Free Report) and Albertsons have mutually agreed to call off their pending merger deal, in the best interest of shareholders. Following the termination, Rite Aid is likely to execute its strategic plan as a standalone company and is focused on leveraging its retail pharmacies, EnvisionRxOptions PBM as well as health and wellness offerings. Also, the company’s board of directors is making governance changes for enhancing its performance.

Consequently, Rite Aid’s stockholders’ special meeting for merger voting, which was scheduled for Aug 9, stands cancelled. However, its annual meeting of stockholders will take place on Oct 30, 2018. Per the terms of the mutual agreement, both Rite Aid and Albertsons will not be liable to make any payments to the other party for the cancellation of the merger.

Following the news, shares of Rite Aid increased 2.3% in after-hours trading on Aug 8. In the past three months, the company's shares have gained 8.1% compared with the industry's 6.6% rally.

 


 

Sources revealed that Rite Aid’s major stakeholders had opposed this $24 billion merger, highlighting that the deal undervalued the company’s retail business and prescription-drug benefit service.

Rite Aid had announced its merger with Albertsons in February 2018. The combined entity was expected to revive Rite Aid’s distressed business and fend off the fear of competition from Amazon (AMZN - Free Report) . Per the deal, for every 10 Rite Aid shares, shareholders were about to receive one Albertsons share and $1.83 in cash or 1.079 Albertsons shares.

Post deal termination, Rite Aid chooses to operate as a standalone company and is expected to continue gaining momentum from its wellness store format, customer loyalty program and pharmacy services. Also, management remains focused on boosting its omni-channel capabilities and product offerings to gain competitive advantage and optimize shareholders’ value. However, we note that the company has been putting up a dismal show for a while now. It has incurred losses in recent quarters besides missing sales estimates in three of the trailing four quarters.

Going back a couple of days, management slashed the net loss per share and EBITDA guidance for fiscal 2019 in response to the recent generic drug bid activity that altered the projections for this market for the rest of the year. The company revealed that the generic drug purchasing efficiencies are likely to be $80 million lower than the projection in its initial guidance provided in April 2018.

Rite Aid now estimates adjusted EBITDA of $540-$590 million, marking a significant decline from the initial guidance of $615-$675 million. Net loss is now projected between $125 million and $170 million compared with $40 million and $95 million anticipated earlier. The company now envisions adjusted net loss per share of 4 cents to a breakeven, against the prior expectation of adjusted net earnings per share of 2-6 cents. The Zacks Consensus Estimate for fiscal 2019 earnings is pegged at 4 cents, which is likely to witness downward revisions in the coming days.

So, it remains to be seen whether Rite Aid will benefit from the dissolution of this merger by enhancing its performance and boosting shareholder value.

Rite Aid which has successfully completed the transfer of all stores and related assets to Walgreens Boots Alliance, Inc. (WBA - Free Report) under its amended and restated asset purchase agreement, carries a Zacks Rank #3 (Hold).

Meanwhile, investors may count on a better-ranked stock such as Herbalife Nutrition Ltd. (HLF - Free Report) , which has a Zacks Rank #2 (Buy) and delivered an average positive earnings surprise of 20.7% in the trailing four quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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