Rite Aid: Worth More Closed Than Open

Includes: CVS, RAD, WBA
by: Larry Abrams

Rite-Aid (NYSE:RAD) is worth more closed than as an ongoing concern. The retail prescription drug business has too many pharmacies as the industry evolves from an era of "competition by convenience" to an era of "competition by price." The WMT $4/generic Rx announcement was the tipping point.

RAD's current tangible book value = $1.1B = $2.6B equity - $1.5B goodwill. This includes mostly inventory and owned property less long term debt. The market value of this is about 80% of book = $880M. Stock market value now is $2.4B. (at $3.00 * 795M shares) So closing it alone, and selling off inventory and owned property would not cover debt and purchase price.

But, there is unbooked, real value in leases and patient records.

Leases are for 10-20 years with current rentals at $600M. Probably 10% below market = $60M/year in leasehold value (i.e. below market rent). Present value -- remember these are for 10-20 year -- is about $600M

Store leases could be sold to the likes of Tesco, Whole Foods, and Trader Joes for debt assumption or equity.

But the real value of a closed RAD is in the patient records. It has about 70M current Rx customers. Transfer value estimates to be about $30 per account sold to WAG and CVS at auction. To keep the auction honest, invite WMT. Net is $2.1B.

Plus WAG and CVS would signal to anyone with intent to close down RAD that they would pay even more for patient records knowing that all those unemployed RAD pharmacists would be depressing the labor market.

So total close-down value for RAD = $3.6B = $880M in tangible book value sold off + $600M in leasehold value + $2.1B in patient accounts. This is $4.53/share = $3.6B/795M shares versus current share price of $3.00.

Disclosure: None