Los Angeles, CA -- (ReleaseWire) -- 07/20/2018 --Today Chris Komatinsky released the following open letter rebuttal to the Rite Aid Corporation Presentation to ISS and Glass Lewis filed with the SEC (NYSE: RAD)
19 July 2018
It's finally come time for Rite Aid to make their "sales pitch" to ISS and Glass Lewis to attempt to get their recommendations for institutions to vote for the Albertsons merger. They've documented this "sales pitch" in a 37 slide presentation filed with the Securities and Exchange Commission on July 17. I use the words "sales pitch" because it clearly is put together to sell Rite Aid's condition as being weak with limited options and Albertsons as a strong and only merger partner.
Examples of Rite Aid management painting Rite Aid's condition being weak and Albertsons as strong versus the real situation:
1. Slide 6 claims that Rite Aid considered unsolicited offers for EnvisionRxOptions Pharmacy Benefit Manager. In the proxy statement, several parties were interested but there was no mention of any effort to hold an auction amongst the parties to see what the PBM could fetch. Slide 16 lists some potentially interested purchasers – Kroger, Walgreens, and Walmart. Amazon may also need a PBM to increase critical mass and add the ability to negotiate with drug makers and payors. Also, why does any deal with the PBM require a complete sale? What controlling interest sales are available to allow continued Rite Aid shareholder participation in PBM growth?
2. Slide 9 highlights the reimbursement rate pressure that is being experience by all pharmacies. While a negative to Rite Aid EBITDA, it's also an opportunity to pursue partnerships with companies with similar smaller pharmacy operations such as national operator Kroger or strong regional chains such as Publix and HEB who are experiencing similar pharmacy EBITDA pressures.
3. Slide 10 shows the Rite Aid stock performance since the Albertsons merger agreement was announced. The market clearly disagrees with the Albertsons' equity value shown on page 11 from day 1 or Rite Aid would be trading near $3/share not $1.7/share.
4. Slide 11 provides valuations based on EBITDA. Rite Aid's pharmacy margins and resulting EBITDA are significantly lower than Pharmacy competitors which is why Walgreens was able to purchase 1,938 pharmacies for $2.2 million/pharmacy (closing 600 pharmacies immediately) and still add to their earnings. What could the Rite Aid pharmacy EBITDA be if run by an effective management team? Slide 11 also doesn't mention projected growth. The proxy clearly shows Rite Aid has the biggest growth potential with revenues increasing 40% in a 5 year span and an EBITDA increase of 35%. Albertsons sees only 10% growth in revenues and 20% in EBITDA. The big driver in this difference is likely the PBM. The PBM is likely the key asset in driving additional customers to Albertsons in this proposed merger and therefore should get a richer valuation.
5. Slide 14 lists Rite Aid's Net Debt/ Adjusted EBITDA as 4.8 as of June 2, 2018. While technically not false it omits two important pieces of information; first, $220 million is still due to be received from Walgreens when the distribution centers are transferred after September 1, 2018 and second, debt also grew partly because of growth in Center for Medicaid Services (CMS) receivables for the Pharmacy Service Segment. Receivables, especially from CMS, are almost the same as cash, and this is what happens when a business is growing. The reality is that Rite Aid's and Albertsons' Net On-Balance Sheet Debt/ Adjusted EBITDA numbers are about the same. Albertsons also carries an Off-Balance sheet pension liability of $4.1 billion that will have to be paid over time. While not "officially" counted in the Debt/ Adjusted EBITDA number, this increases Albertsons' leverage by 1.5 X over Rite Aid's.
6. In Slide 23, Rite Aid mentions Albertson' Financial Momentum. Identical store sales of 0.6% and 0.2% after deeper falls last year show little to no sales growth momentum especially compared to competitors such as Kroger. The growth in EBITDA shows that Albertsons is controlling costs but how much of the most recent improvement is from temporary measures such as reduced advertising spending? Is this maintainable over time in a competitive grocery environment?
7. Slide 30 identifies plans for the Combined Company Board of Directors. Our hundreds of individual Rite Aid shareholders holding approximately 45 million shares have no confidence in John T. Standley as CEO and Board Member of the New Company given his failure to effectively adapt to the changing Health Market conditions while CEO of Rite Aid which will continue with the New Company and be compounded by the changing Grocery Market conditions. We also have no confidence in Board Members David R. Jesseck, Michael N. Regan, and Marcy Syms to provide effective and shareholder friendly Board Governance of the New Company based on their Rite Aid track records.
I'm still an "Against" vote on the merger at this time based on the low valuation of Rite Aid's assets in the merger agreement, based on no confidence in the proposed Merged Company Management and Board plans, and needing to see more proof of a sustainable turnaround in Albertson's financial momentum before irrevocably merging with them and their highly indebted balance sheet.
I also recommend an immediate change in Rite Aid CEO and the Rite Aid Board of Directors based on their poor performance in handling the Walgreens merger process, specifically their falling asleep at the controls of Rite Aid while waiting for Federal Trade Commission merger approval, their deceptive communication with shareholders following the Walgreens merger termination that the plan was to move forward with Rite Aid as a strong regional pharmacy with a fast growing PBM when in reality they began merger discussions with Albertsons from almost Day 1, and what I believe are breaches of their fiduciary duties in agreeing to the current merger terms and in "talking down" the value of Rite Aid assets to get Rite Aid shareholders to vote for the proposed merger.
Feel free to contact me if you have any questions.
Individual Rite Aid Stockholder