Today Chris Komatinsky released the following Open Letter to Stockholders of Rite Aid Corporation (NYSE:RAD):
Los Angeles, CA -- (ReleaseWire) -- 07/03/2018 --Today Chris Komatinsky released the following open letter to stockholders of Rite Aid Corporation (NYSE: RAD):
It's been a busy week for Rite Aid, the proposed merger between Rite Aid & Albertsons, and the Pharmacy Sector. At the end of this busy week and after consideration of all this new data, I continue to recommend you vote "against" the merger and the other two items in the proxy. A summary of my thoughts on this new data are provided below:
1. Rite Aid reported earnings this week. The results reported show clear evidence of a turnaround in both the Pharmacy stores and the Pharmacy Benefits Manager (PBM) even with the drag of $7 million in merger costs in the quarter.
2. The Rite Aid/Albertsons S-4 share registration and proxy were declared effective by the SEC and have been sent out for Rite aid shareholders to vote. Voting can be done as late as August 8th to allow you to consider additional information. Two specific items to be looking for are Albertsons' 1st quarter results sometime in mid-July and the recommendations from ISS and Glass Lewis advisory firms.
3. Highfields Capital Management issued a press release announcing their intent to vote against the proposed merger as presently constituted because "it is in the best interests of Albertsons and Rite Aid Management, but not Rite Aid shareholders". Highfields Capital Management owned 47 million shares of Rite Aid as of 3/31/2018. Their against votes added to the 45 to 50 million held by hundreds of individual shareholders who have expressed their against votes at the www.riteaidmerger.com website or to me directly by phone or e-mail brings us to 10% vocally against the proposed merger – everyone coming to the same assessment quoted above.
4. Rite Aid Management and Board of Directors have gone into full blown sales mode to try to get this merger approved by shareholders as evidenced in the desperate, arm waving statements made in their materials:
a. Rite Aid Management seems to use numbers that make Rite Aid look weaker and Albertsons look stronger to sell that we would get stronger financially from this merger. The letter to shareholders mentions a "current standalone Rite Aid leverage of 4.6x as of June 1, 2018". What they have conveniently left out is that Rite Aid will receive another $220 million as the final part of the Walgreen asset sale after September 1. In fact, page 23 of the May 15,, 2018 investor presentation lists Rite Aid leverage as 4.2x and Albertsons leverage as 4.3x. Note that the Albertsons leverage figure does not include their $4.1 Billion pension liability (Pension liability, while not included in the balance sheet, comes ahead of equity in terms of claims on the company assets). From page 140 of the proxy, a standalone Rite Aid is projected to grow revenues and EBITDA faster than Albertsons over the 5 year period. At best this merger is providing us increased scale, revenue diversification, and a 30% share of potential synergies (minus higher pension costs) in return for 70% of our higher projected growth.
b. Several proxy statements imply a detailed, analytical approach to assessing the potential positives and negatives of merging with Albertsons. When I asked Rite Aid Investor Relations to share this work so shareholders can objectively assess it, the response I received was, "What is said in the proxy is what we are disclosing." This says to me that no homework was done/is available to share, just trust us.
"there is evidence to suggest that ACI is in the early stages of enjoying the benefits of its turnaround strategy, with increasing sales and profitability"
"The Rite Aid board of directors weighed the foregoing against a number of potentially negative factors"
c. Some companies have successfully navigated challenging times over the past few years. Why would Rite Aid shareholders want to navigate the coming challenging years as a standalone or merged with the same management and board that couldn't navigate through the past challenges?
"Over the last few years, we have faced unprecedented challenges in our industry. Our management team and Board of Directors have worked hard to respond to these challenges with decisive action"
"Shareholders will benefit from the combined expertise of the Rite Aid and Albertsons management teams in leading the company"
d. Albertsons is just a potential merger partner. Kroger, in fact, would be the better, safer merger partner given their lower debt, higher store count, and higher pharmacy count. It's unlikely Kroger would want to keep Standley and the 4 Board members on as part of a merger with Kroger.
"The Rite Aid Board and management team are confident that the merger with Albertsons is the right combination, with the right partner, at the right time"
e. The Rite Aid Management and BOD letter to shareholders goes to great lengths to stress "there's probably no one else interested in acquiring Rite Aid". As detailed in the proxy, several parties expressed an interest in the PBM. The proxy makes no mention of Rite Aid Management and the BOD following up on this interest to even understand the value relative to the Albertsons merger agreement. With the lives added to the PBM already this year and the proposed business combinations announced after 20 Feb, the PBM is even more valuable in a sale or partnership.
5. Finally, the elephant in the room – Amazon's announcement to purchase Pillpack as an entry into the mail order pharmacy sector.
First, Pillpack is currently very small – I read estimates of 40,000 customers and $100 million in revenue for 2017. They are nowhere near the economies of scale in purchasing that CVS, Walgreens, Walmart, and even Rite Aid have in drug purchasing. Obviously the big risk is that Amazon can subsidize this difference indefinitely to build market share. It might be an interesting Federal Trade Commission review especially given how Wall Street reacted to the announcement.
Second, Pillpack's business angle is the aggregation of multiple maintenance prescriptions, over-the-counter drugs, and vitamins sorted into daily, easy to open plastic bags. Super convenient, but as a Safety Engineer in my day job I immediately thought, "How can they be supplying drugs in easy to open plastic bags while most of the market is supplying drugs in child resistant containers?". The Code of Federal Regulations on drug packaging does allow an exception for non-compliant packaging for those that need easier to open packaging. I would think that the Consumer Product Safety Commission might have some concerns with easy to open drug packaging becoming the norm though.
Third, the Insurance and Pharmacy sector have moved to a 90 day supply model for maintenance medications as most efficient with co-pay incentives for using this route. From Pillpack's Billing & Insurance Webpage – "If you are currently receiving 90-day supplies, you may pay a slightly higher copay with PillPack". Higher co-pays will discourage many potential users.
Fourth, if you get sick and need a short term medication, Pillpack is not an option.
Feel free to contact me if you have any questions.
Individual Rite Aid Stockholder