Dive Brief:
- Rite Aid lowered its profitability guidance for this year, forecasting a loss after previously estimating a $.02 to $.06 profit per share. The move sent Rite Aid shares tumbling 12.5%.
- Susquehanna litigation analyst Joseph Stauff wrote in a note that the “unusual” move was aimed at drumming up support for Rite Aid’s merger with Albertsons ahead of Thursday’s shareholder vote.
- Late last month, two prominent advisory firms, Glass Lewis and Institutional Shareholder Services (ISS) came out against the merger, saying the deal undervalues Rite Aid.
Dive Insight:
Could the Rite Aid/Albertsons merger be on the ropes ahead of this week’s shareholder vote? According to Susquehanna analyst Stauff, Rite Aid’s guidance warning indicates the company doesn’t see enough yes votes to get the merger approved and wants to “scare” shareholders into approving it.
The pharmacy retailer’s tie-up with Albertsons has certainly run into some significant headwinds over the past few months. Highfields Capital Management, which owns a 4.4% stake in Rite Aid, has come out against the merger while one Los Angeles investor whose family owns 1.5 million Rite Aid shares has rallied opposition and called for an independent investigation into the deal.
Last month, influential proxy advisors ISS and Glass Lewis issued reports opposing the deal despite supporting the rationale behind it. Both firms wrote that the merger undervalues Rite Aid and exposes shareholders to significant risk, in spite of the nearly $400 million in cost savings the two companies say they will achieve.
"Strategically, the proposed merger appears to be a step in the right direction, as it provides [Rite Aid] with increased scale and diversification,” ISS wrote in its report. “However, the transaction would introduce a new set of risks associated with the grocery business, and the combined company's leverage could limit investment in two evolving business environments," ISS wrote.”
ISS and Glass Lewis’s opposition is significant, Bloomberg notes, because many shareholders vote in line with the firms’ guidance.
Under the deal, Rite Aid shareholders would gain a 29% stake in the combined company, which will go public after the deal is finalized. But because Albertsons is a private company, its valuation is open to interpretation. Both ISS and Glass Lewis argue that the grocery retailer would be getting Rite Aid at a discount, while the companies have said they strongly disagree.
During its earnings call last month, Albertsons executives went to great lengths to promote the tie-up, noting that the retailer's pharmacy customers spend 3.5 times as much with the company per transaction compared to regular customers, and that the merger would result in an estimated $375 million in annual run-rate synergies over three years.
Despite its risks, the deal would offer both companies significant advantages in the rapidly consolidating food and pharmacy industries. But first it has to survive a do-or-die shareholder vote this Thursday.
