RAD - Rite Aid Corporation

[Zorrofan]

I'm not sure if I should call this an "arb opportunity" or a "lottery ticket".  Walgreens certified compliance on May 8th and the FTC has 60 days (less now) to respond.

 

It seems to me that there are three possible outcomes:

 

1. FTC approves the takeover, with RAD being bought for between $6.50 and $7.00 depending on the number of stores the FTC wants divested. Assume a $6.50 takeover price, buying today at $3.65 yields a 71% return in less than 60 days.

 

2. FTC does not allow the takeover. RAD falls, likely quite a lot, and some private equity firm steps in. RAD has value even without the takeover and in the right hands it should be worth more than $3.65 it trades at today

 

3. Takeover does not go through, company flounders and goes bankrupt, with the shares going to zero.

 

This seems high risk, high reward. Thoughts anyone? 

Full disclosure - I nibbled today

 

cheers

Zorro

[winjitsu]

I'm not sure if I should call this an "arb opportunity" or a "lottery ticket".  Walgreens certified compliance on May 8th and the FTC has 60 days (less now) to respond.

 

It seems to me that there are three possible outcomes:

 

1. FTC approves the takeover, with RAD being bought for between $6.50 and $7.00 depending on the number of stores the FTC wants divested. Assume a $6.50 takeover price, buying today at $3.65 yields a 71% return in less than 60 days.

 

2. FTC does not allow the takeover. RAD falls, likely quite a lot, and some private equity firm steps in. RAD has value even without the takeover and in the right hands it should be worth more than $3.65 it trades at today

 

3. Takeover does not go through, company flounders and goes bankrupt, with the shares going to zero.

 

This seems high risk, high reward. Thoughts anyone? 

Full disclosure - I nibbled today

 

cheers

Zorro

 

Doesn't this trade just scream for an options play? Your outcome is pretty much binary

[mttddd]

Anyone playing this? Iv been considering buying some call options, I get the impression that the FTC doesnt want to allow the merger but it seems like they are struggling to justify it. I doubt they vote 2-0 to allow it but i could see a split decision meaning it goes through.

 

Iv got some cash sitting around in my speculation account and might throw a small amount into this

[orthopa]

Have been watching. The 7/7 weeklys would be the way to go. implied volatility very high though. $$$

[fareastwarriors]

Walgreens Gives Up on Rite Aid Deal, Will Buy Stores Instead

 

https://www.bloomberg.com/news/articles/2017-06-29/walgreens-to-buy-2-186-rite-aid-stores-in-5-18-billion-deal

[Uccmal]

Rite Aid has been like the hot potato of the retail drug store industry. 

 

They nearly sunk Jean Coutu when JC's son decided he wanted to expand into the US.  Dad jad to come back as CEO and unwind the mess that was created.  I was a PJC shareholder at the time.  I finally gave up.  It took hears after that for PJC to get their geoove back. 

 

Seems Walgreens gets the business without getting the business, so to speak. 

[valuedontlie]

At $2.80/share this looks sort of interesting...

 

Market cap $2.95bn and pro-forma net debt of $2.2bn ($7.1bn current less $4.6bn net proceeds from sale less $325m term fee) = $5.15bn EV

 

They said net leverage will be cut in half so 3.4x or $645m approx EBITDA. Looks like they're selling stores to WBA at >12x EBITDA and will be trading at ~8x themselves.

 

Free cash flow should improve significantly if they use most/all proceeds to pay down debt. They have $3.5bn in expensive debt that would save $246m annually alone (before taxes).

 

Business still struggling mightily. Comps down 3.9% in Q1.

[JayGatsby]

At $2.80/share this looks sort of interesting...

 

Market cap $2.95bn and pro-forma net debt of $2.2bn ($7.1bn current less $4.6bn net proceeds from sale less $325m term fee) = $5.15bn EV

 

Where are you getting the $4.6B? My read is that they're selling the stores for $5.175 and collecting the $325 term fee (so $5.5B total), but I haven't dug in deeply. Given prior NOLs, I was assuming taxes on the transaction would be minimal.

[valuedontlie]

At $2.80/share this looks sort of interesting...

 

Market cap $2.95bn and pro-forma net debt of $2.2bn ($7.1bn current less $4.6bn net proceeds from sale less $325m term fee) = $5.15bn EV

 

Where are you getting the $4.6B? My read is that they're selling the stores for $5.175 and collecting the $325 term fee (so $5.5B total), but I haven't dug in deeply. Given prior NOLs, I was assuming taxes on the transaction would be minimal.

 

On today's call they guided to $525-625m in payments for A/P, transaction costs, and taxes -- net proceeds from the sale of $4.5-4.7bn.

[JayGatsby]

On today's call they guided to $525-625m in payments for A/P, transaction costs, and taxes -- net proceeds from the sale of $4.5-4.7bn.

Got it, thanks.

[valuedontlie]

RayJay came out with SOTP value of $2.04 for post-close RAD... their approach seems silly to me...

 

They used P/EBITDA of 8.5x for PBM side of business and $200k value per store for retail (or 1.1x P/EBITDA for that side of business)...

[Zorrofan]

Based on the huge volume yesterday and today someone seems to see value at this point.  Could a PE firm be buying in? It  would seem unlikely at least to me that its just retail investors buying, they are the ones likely panic selling at this point.

 

cheers

Zorro

[Jurgis]

Based on the huge volume yesterday and today someone seems to see value at this point.  Could a PE firm be buying in? It  would seem unlikely at least to me that its just retail investors buying, they are the ones likely panic selling at this point.

 

cheers

Zorro

 

I thought that the buying was from AMZN takeover/whatever rumor, no?

 

I have to admit I only saw this somewhere fleetingly though.

[mcliu]

RiteAid does seem ripe for an activist to shake things up..

[JRM]

I'm surprised there's not more discussion about the current situation for RAD.  Could somebody tell me what I'm missing?

 

It looks to me like there was a lot of forced selling after the WAG deal was terminated.  Also, I'm guessing many institutional funds aren't allowed to own RAD as it is trading for less than $5.

 

This looks like a situation where the market is under-estimating the chance that the new WAG deal goes through (recency bias?).  If the deal goes through this is easily a double.  Because WAG exited the deal prior to an FTC decision, they probably knew they deal was unlikely to go through.  My guess is WAG management was in discussions with the FTC and should have a pretty good feeling for what they would be willing to accept.  I don't think WAG would have pre-maturely killed the deal only to follow it up with a modified deal if they weren't confident that it would go through (yes, I know they already modified it once).

 

Even if the deal doesn't go through RiteAid has few options other than to sell stores and de-lever its balance sheet.  They've been in liquidation mode for the past 2+ years, so either they get new management or they continue to try to sell off the business.

 

The PBM business was purchased for ~$2B, and sales are up 50% since they purchased it.  I would think the PBM is worth at least what they paid for it (unless they become a distressed seller).  At the current share price I'm basically buying the PBM and getting the rest of the business for free (almost). 

 

The downside is obviously bankruptcy, but I think the market is over-estimating this outcome.

[JRM]

Interesting (but not surprising) market reaction today on the FTC approval of the modified Walgreens deal to purchase 1,932 stores for $4.375B.  This was a reduction in store count and price paid per store.  However, Rite Aid still has the option for the 10-year generics purchase agreement through Walgreens, they still have Envision, and they will still be able to pay off a lot of debt.

 

I think I may sell some puts.  Ok, I'm done talking to myself.

[JRM]

https://www.cnbc.com/2018/02/20/albertsons-to-acquire-rite-aid-in-defense-move-against-amazon.html

 

Looks like this one may work out sooner than I expected.

[HalfMeasure]

https://www.cnbc.com/2018/02/20/albertsons-to-acquire-rite-aid-in-defense-move-against-amazon.html

 

Looks like this one may work out sooner than I expected.

 

How do you feel about the consideration offered in the transaction?

[JRM]

The offer, as far as I can tell, is in the money given my cost basis.  However, I don't very much like the deal and I don't want shares of Albertsons.  It looks like Cerebus is using this as an opportunity to cash out before Amazon and Wal-Mart take them out.

 

Not that my opinion matters, but I thought a bid would come in around $3.  A $2.49-$2.50 bid for cash+shares or all shares seems pretty low ball.  I can't believe Standley instituted a poison pill and thinks this is a good offer.

[Aqul]

Anyone interested at these levels? If they hit anywhere near those synergy targets, you are creating the company at a dirt cheap price...

[JRM]

The upside scenario from here is that shareholders vote down the deal and remove current management.  There are no synergies with this deal.  It is a last ditch effort for Cerberus to cash out of Albertsons after loading it up with debt and for Standley to run the new company.

 

There is value in Rite Aid, but this deal definitely cuts the legs out.

[HalfMeasure]

The upside scenario from here is that shareholders vote down the deal and remove current management.  There are no synergies with this deal.  It is a last ditch effort for Cerberus to cash out of Albertsons after loading it up with debt and for Standley to run the new company.

 

There is value in Rite Aid, but this deal definitely cuts the legs out.

 

Anyone have any opinions on the "tax benefit preservation plan"?

[JRM]

The best that I can tell is it was a disguised poison pill designed to allow Standley time to establish a deal with Albertsons before a hostile takeover occurred.  This poison pill effectively gave management the option to dilute any shareholder that attempted to take a 5% or greater stake.  A hostile takeover could still occur, but it would be more difficult. 

 

It's pretty appalling that the deal Standley wanted to protect was a $2.50 reverse IPO merger with Albertsons.  It looks like to me like Albertsons is getting RiteAid for a steal, and the combined entity will likely value the combined RiteAid+Albertsons with a lower multiple than what the market should assign a standalone RiteAid this time next year with reduced debt and interest payments.  The worst part is RiteAid has to pay Albertsons a $60M breakup fee if the shareholders vote down the deal.  That would be worth it to me, though, to clean out the BOD and CEO positions.

 

This is a 2% position for me, so I'm following along mostly for entertainment value at this point.  I don't think sentiment can get much worse at this point.  Then again, I couldn't have been more wrong up to this point.