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  • SunEdison Should Ultimately Walk Away From The Vivint Solar Acquisition And Fire Its CEO [View article]
    “Investors may face a total loss if the company does not act decisively within the next few days.”

    I believe you are exaggerating the situation. I am not aware of anything that could occur in the next few days, weeks, or even months that would cause investors to endure a total loss (which I interpret as bankruptcy). While the stock price has been bloodied beyond recognition, there is no evidence that SUNE is anywhere near insolvency. In fact, debt holders are doing just fine at the moment. Has the company taken a wrong turn at Albuquerque? Absolutely.

    The Vivint deal is a mistake, and I don’t think anyone will argue that point. Exactly who should be fired over it, if anyone, is unclear. Deals of this size must be approved by the Board of Directors. Given that the BOD would need to fire management for a bonehead decision, they would then need to also fire themselves. Of course, I’m sure that many SUNE investors would be okay with both of those decisions, but it is not how things typically work, especially without the involvement of a major activist. That said, you can be sure that any major hedge funds who are still holding have had plenty of conversations with the BOD about Vivint, Chatila, etc.

    Calling for SUNE to call off the Vivint deal is ill conceived. If they could back out and lose only an arm and a leg, they would have done so already. As you note, Blackrock was on the other side of the deal. They are smarter than the folks running SUNE, so you can be sure that they wrote an agreement that gave them quite a bit of protection just in case the buyer woke up some morning and realized that they were overpaying. If you look closely at CC transcripts, it’s quite clear that SUNE is not in a position to walk away, so the penalty of doing so must be just as onerous as having to follow through. It’s a shotgun wedding at this point.

    If there is any escape available at all, it would have to be one where Vivint shareholders fail to approve the deal. When you think of it from that angle, probably the only thing to possibly cause that to come about it that the stock portion of the payment (SUNE shares) has diminished to a level that is unacceptable. Is SUNE intentionally destroying the value of their equity as a last ditch effort to slide out of a bad deal? I wouldn’t go so far as to say that they are doing this on purpose. But, it could have that effect.

    Meanwhile, if you look at how much market cap has been lost in SUNE since the time that the Vivint deal was announced, you can’t really say that it is the only reason for the drop, since the loss has been several times larger than the total purchase price for the acquisition. So, there are several more factors at work, or the market has severely overreacted. Or it could be some of both.
    Nov 12, 2015. 02:22 AM | 27 Likes Like |Link to Comment
  • Safe 15% Annual Return With Rite Aid [View article]
    Lakeaffect, CVS didn’t bid on RAD for at least 3 reasons. 1) They have significantly more store overlap with RAD than WBA does, so the divestiture requirements would have made it untenable; 2) CVS has a huge mail-order business, making their overall market share for prescription drugs larger than WBA’s by quite a bit. For this reason alone, I think regulators would have forbid the combination.; 3) CVS just purchased a large PBM for something like $11 billion and they are now in the process of trying to close on Target’s drugstore business. They do not have the bandwidth or maybe even the financial ability to do this kind of deal with RAD.
    Nov 4, 2015. 02:06 AM | 5 Likes Like |Link to Comment
  • Safe 15% Annual Return With Rite Aid [View article]
    Leehoffman, I think you may be misunderstanding how the process works. Regulators, and in many cases this will be in conjunction with the state AG’s, will look locale by locale to see if the combined WBA/RAD has 50% plus of the market for prescription drugs. If they don’t, then they get a pass.

    To do the arithmetic, you need to include all pharmacies, which means standalone drugstores, grocery store pharmacies, independents, Costco, Walmart, Target, Sam’s Club, and so on. You will find that there are relatively few MSA’s where this combination of WBA and RAD arrives at 50%+, which is why the analysts are anticipating fewer than 500 required divestitures.

    Almost by definition, in the most of the places where WBA and RAD add to over 50% of the market, CVS will have very little presence, and will in gladly buy stores. If CVS is already there, then probably so is Kroger, Safeway, Walmart and others. And then there’s no issue in the first place.

    Also consider that the concentration issue can be resolved via prescription files. In other words, if CVS, WBA, and RAD are the only drugstores in some town, and WBA+RAD = >50%, then one or more stores can be closed and the files sold to CVS so that the 50% concentration is no longer true.

    I understand why people think that these stores are going to be sold at “fire sale” prices. I think it’s true that they will not be sold for top dollar. But, keep in mind that once the discount goes beyond more than maybe 20%, and independent or private equity is going to become interested. I doubt that, all told, WBA takes more than maybe a $50 million hit on discount of stores being sold off. Keep in mind that this sort of acquisition/consolidation process has been done successfully many times over the years. CVS bought a large part of Brooks-Eckerd, and RAD bought the other part. Divestitures happened and it wasn’t a crisis.

    WBA is a US corporation based in Illinois. So, they are subject to IRS rules and also allowed to use NOL carryforwards, just as any other US corporation. Having operations in other parts of the world is not relevant to their US operations. Also, RAD is going to be operated as a subsidiary. So, the NOL’s will be retained at that level and offset subsidiary income. This is one reason why, even though it may have at times seemed appropriate to sell off RAD assets (piecemeal) to the highest bidder, the NOL’s would have been lost, because they have to survive within the entity.
    Nov 4, 2015. 02:05 AM | 5 Likes Like |Link to Comment
  • Safe 15% Annual Return With Rite Aid [View article]
    Much appreciated, popeye. I think we are both feeling relieved and livid at once.
    Nov 4, 2015. 02:04 AM | Likes Like |Link to Comment
  • Safe 15% Annual Return With Rite Aid [View article]
    Thanks for the article, Chris.

    The tax asset has often been overlooked in analyses of fair value for RAD; I’m glad that you have highlighted it. This is the leading reason that WBA is not going to rebrand RAD right away. They will be operated as a subsidiary, which allows the NOL to be preserved. While it is true that RAD as a standalone would have been able to utilize the NOL on their own, it will benefit WBA more quickly, because any store that is determined to be a survivor after consolidation will get remodeled, if it has not been already. And, of course, operating costs are going to decrease across the board because of economies of scale, driving up margins.

    Aside from this deal not being at risk of getting a regulatory kibosh, I believe RAD shareholders will approve it. Retail shareholders should recognize that over 50% of the outstanding shares are held by fewer than 10 institutions. So, unless a meaningful number of them decide that they are unimpressed with the deal, it will get plenty of votes. My experience with other acquisitions is that institutions are not likely to throw their weight around as long as they feel that they are coming out ahead. That, and they like to get paid cash and move on, which is at least one reason that the offer was not made with WBA stock.

    Would $10 have been a bit more “fair” of an offer? In my opinion, yes. And, I suppose that if WBA thought that they needed to dole out another buck in order to win approval, they would. Otherwise, the deal stands, and WBA gets what seems like a very favorable price to them. They are understating the benefits, because they want approval.

    I think RAD retail shareholders may want to be careful what they wish for. If by some magic they had the votes to quash the deal, then what? Unless another suitor appears over the next 5 weeks or so, there isn’t one. A board and management team that was focused on maximizing shareholder value could take the company, in the case of a deal rejection, and create an even better return. But, that is not the kind of board and management team that is running this company.

    A team who wanted to maximize value would, in the case of a failed deal, sell the entire west region to WBA for $3 to $4 billion, sell the Midwest and parts of the south to CVS and WBA for another $2 billion, get rid of Envision and hopefully get the $2 billion they paid, and of course take all of the proceeds and pay off 100% of the debt. What would remain would be an extremely dense and profitable Northeast/mid-Atlantic chain of maybe 1800 stores. Of course, this could have been done long ago. But, as is typical, the people who run these companies would rather be captains of the biggest ship possible, even if it the sails are tattered and the hull leaks.

    Anyway, I agree that the deal is going to get done, and holding onto the shares provides a meaningful ROI, even if it takes a full year to close.
    Nov 3, 2015. 09:27 PM | 10 Likes Like |Link to Comment
  • Walgreens: Could sell 1,000 stores for Rite Aid deal if required [View news story]
    This news was out on Friday, but seems to have received little notice. So, it’s good that it was finally picked up on SA. I’ve read a number of articles here, as well as posts from armchair analysts, that proclaim that the WBA/RAD merger won’t close. Guess again.

    The standard argument is something like “in my town, there is a Rite Aid across from a Walgreens and we don’t have a CVS”, or something similar. Most people do not have a deep understanding of anti-trust regulations, nor more than a cursory grasp of the retail drugstore environment in the US.

    The short story is that there are far more places to buy prescription drugs than most people think about. Aside from WBA, CVS, and RAD, there are literally thousands of grocery store pharmacies, Walmart, Costco, Sam’s Club, some large regional chains, and thousands of independent drugstores. On top of that, millions of people receive their prescription drugs in the mail. There are relatively few locales where combining WBA and RAD would result in an anti-competitive environment.

    Several well respected analysts have looked at this possible combination long before it was announced, and each concluded that under 500 stores would need to be sold. It is no surprise that the WBA presentation states the same thing. Ed Kelly at Credit Suisse determined that between 150 and 500 stores would need to be sold, and this analysis was done by MSA, so it is far from a back of the envelope calculation. So, the prediction that fewer than 500 stores will be involved is reasonably solid.

    In that the agreement allows for up to 1,000 stores to be sold, you get a crystal clear idea that WBA is serious about making this deal close, and short of a better competing offer, I see virtually nothing stopping it. Based on everything I’ve read and having watched similar processes over the years, my guess is that RAD stock’s price will slowly rise (with some blips) as we move closer to the finalization of this deal. I would allow up to a year for that to happen. I don’t think the arbs are too involved quite yet, but that will change once they become more comfortable about the arrangement.

    Will there be a competing bid? As has been stated numerous times, nobody is yet privy to the process that led to the definitive agreement. If there was already a go-shop period, then it’s unlikely that anyone will emerge to challenge the $9 price tag. On the one hand, it is hard to imagine no go-shop, especially given that RAD traded over the acquisition price just last August. That just seems like begging for litigation and other challenges. On the other hand, it is difficult to conceive how a full go-shop could have taken place in what must have been a relatively short period of time.

    If RAD was not shopped, then there are probably only 3 possible other buyers. ESRX, McKesson, and Kroger. ESRX is the odd man out if this deal completes, because there are no remaining large drugstore chains. That means that CVS will hold a permanent competitive advantage over them. Furthermore, there is little doubt that the pure PBM model is headed for extinction, though it will take several years for the process to complete. Kroger has the financial muscle to do a deal, and because they have virtually no representation in the Northeast, this gives them a tremendous foothold. They already have a couple thousand pharmacies, so it’s a reasonably natural fit. McKesson may be interested because they stand to lose a large customer in this deal, and they are already quite connected operationally. However, it is not impossible that RAD retains them as a distributor over the long haul, particularly because regulators may have a say about this.

    So, who is NOT a possible buyer? Walmart. They will absolutely not ever buy a union shop. Also, their much touted small format program is actually not going as well as hoped and they are slowing the program. In their most recent conference call they shared that it is more challenging to make a buck in the city than they had realized. And you can count out private equity. While I think lay people are far too daunted about the size of RAD’s debt at around $7 billion, because in modern terms that is really not so much for a large company like WBA, KR, ESRX, etc., for private equity it is a non-starter. They like to lever up to buy companies, not take on existing leverage. You can also count out CVS. They are in the midst of a completing a couple of acquisitions right now and don’t have the bandwidth. They also would have far more regulatory challenges, probably to the point of simply not being able to complete the deal. Aside from having more overlap than WBA, they also have a PBM. As it stands, their business is already larger than the combined WBA/RAD.

    Some people say that there is no competitor in the wings, because the stock price hasn’t risen over $9, and so on. The notion here is that Wall Street always knows what is happening in private. It’s a reasonable way of looking at things, but not an ironclad argument. The day before this deal was announced, RAD could be purchased for $6. Where were these Wall Street know-it-alls on that day and the day before that? My guess is that the chances of a higher offer are maybe 50%, and if none emerges, it decreases to about 30% by the end of this month. The longer one waits, the harder it is to break the deal, because the break up penalty of $325 million would increase by whatever WBA had expended in the process of taking the deal to a close.

    Even if there is no competing offer, for those who want to earn a solid ROI over the next year will do pretty well. That’s just my opinion, of course. Right now, I think that those exiting the stock are speculators to whom 12+% annual ROI is not attractive, because they are hunting for 4 baggers. And, of course, who knows how many millions of shares a day are being traded back and forth between machines that are across the street from one another. GLTA
    Nov 2, 2015. 08:10 PM | 18 Likes Like |Link to Comment
  • Regulatory concerns surround Walgreens, Rite Aid deal [View news story]
    They will sell some stores to CVS. This happens all of the time.
    Oct 29, 2015. 10:14 PM | Likes Like |Link to Comment
  • Walgreens Got Rite Aid For A Song [View article]
    I’ll chime in here, just to dispel some misunderstandings on a few topics.
    The chances of this deal getting derailed by regulators is very small. While I appreciate that many people have an impression of what constitutes an anti-competitive situation, based on their own corner of the world, the way it works for the FTC is much less emotional. No amount of arm chair speculation changes the ways of government.

    They will look at market concentration by locale, both in terms of overall percentage, as well as reasonable options for consumers. The litmus test has traditionally been 50% concentration, but some believe that if the FTC is feeling feisty, it will be as low as 45%. The combined WBA/RAD does not reach either figure in most places. Keep in mind, and this has been mentioned by others, that there are 6 ways to Sunday to purchase prescriptions, and even more for buying what the front end sells. If you look at CVS’s combined retail and mailorder business, it still exceeds the WBA/RAD combined share.

    Also keep in mind that regulators allowed Express Scripts and Medco to combine, as well as CVS and Caremark (with some regrets), and also the major health insurers. It would be grossly inconsistent to have allowed constituents further up the chain to accrue outsized power, and then turn around and say that retailers cannot battle back. In fact, creating more critical mass at retail is more likely to push back on PBM and insurance margins than to have any negative effect on consumers. The only losers here are the upstream suppliers, and I have a feeling that nobody is going to shed a tear for United Health, Express Scripts, Valeant, McKesson, and so on. The only possible negative impact that government cares about is on government, which is also a large 3rd party payer. Since they are the dealer at the table, it is probably not a realistic concern, because they will simply legislate what is needed to ensure that they don’t lose anything on this.
    Anyway, when it comes to anti-trust, don’t take it from me (or anyone on SA). Practically every expert on the topic, including former FTC executives have said that this deal will go though. Let’s be realistic here. Walgreens doesn’t shoot from the hip. They have talked to a myriad of experts, and possibly already spoken with government on the topic. So, you can sit in your armchair and talk about what’s happening in your town, but it doesn’t actually matter, because this deal is essentially done.

    What you can still expect to see is a lot of noise, which is just part of doing this kind of deal. Politicians are going to grandstand, because that is what they do. There will be committees and hearings and so on. Various AG’s will get in on the act. It’s all a show. And because we are talking politics here, let’s not forget that Uncle Sam owes one to WBA for aborting their inversion plans. That meant a huge amount of tax revenue for the IRS.

    Undoubtedly, there will be some stores divested, and experts say it is between 150 and 500, which seems realistic. Remember the criteria mentioned above. Most of these will probably be picked up by CVS. It’s unlikely that independents want these, other than perhaps a regional chain. Keep in mind that regulatory issues are not resolved by closing stores. If it is about competition, the store does actually have to be sold to someone or consumers are not being “helped”. That said, there is no requirement that the competitor be worthy or that they even survive. Look no further to what happened recently with the Albertson’s purchase of Safeway. About 160 stores were sold to Haggen in order to satisfy the FTC. Months later, they have nearly all closed. Oops.

    For anyone who thinks that WBA is buying RAD for the PBM, I respectfully disagree. Envision is insignificant in scale and if WBA wanted to get into the PBM business, they would have purchased someone much larger. I think that what Pessina sees, and I tend to agree, is that the PBM business is going to fade away over time. They are middle men who take a cut, and the invisible hand inevitably eliminates middle men. There is no reason that the United Healthcares, WBAs, and others can’t handle the distribution of drugs to consumers. And, if anyone is needed in the middle to aggregate purchasing and distribution, it can be handled by AmerisourceBergen and McKesson. Anyone who is interested in seeing the true future of WBA should visit a Boot’s store. That is where they are headed, and I think they will do very well. That is not to say that WBA won’t handle some mail-order. But, it is not going to be their preference or a business they want to grow, because it destroys the benefits of bricks and mortar.

    A few other housekeeping items here.

    The reason that Rite Aid is being operated as a separate entity is for tax reasons. Read up on NOL carryforwards and you will understand why that is. So, don’t expect any signage changes for quite a while. That also means that John Standley and crew get to keep their jobs for a while. In fact, they’ve already rewarded themselves with a new round of promotions. And, Vetrano is staying on to help with strategic visioning and business development… because I’m sure that WBA has no such skills in house (sarcasm here, for those who can’t see it). The largesse, hubris and self-dealing is thick enough to cut with a chainsaw here.

    Regarding sales per square foot is so much higher at WBA than RAD is not just a function of operating acumen. It’s about real estate. WBA stores are on the corner of Main and Main, and that drives traffic. Rite Aid has some great real estate, but also plenty of clunkers in old strip malls that no longer make sense in terms of traffic flow. They also have some old larger format stores that are from the Thrifty-Payless days. The point here is that it would be impossible to get the sales at the existing RAD base up to WBA levels.

    There is, of course, a lot of room for improvement, and WBA has the capital to make it happen quickly. They will monetize this acquisition quickly, and they are being coy at the moment, because they need to get past the FTC, and also it is impolite to publicly state that they just stole Rite Aid at a 10%+ discount to fair value. RAD shareholders are upset enough as it is. After the sale is closed, there will be some store consolidation, which at first will not help the bottom line, because they will be paying for some dark leases. To the extent that those locations get filled by another business, they are off the hook. The $1 billion in synergies comes from rationalizing distribution, eliminating redundant marketing costs, administrative personnel, purchasing, and so on. I think that number is smaller than what they will actually realize over a couple of years, and when you add in the improved sales and margins at legacy RAD locations, they stand to pay off this acquisition rather quickly.

    Here’s a parting factoid. The drop in WBA’s market cap after the deal was announced is equal to the entire amount being paid to RAD shareholders. That may give you a sense of the disparity in size, and how little is being paid here.
    Oct 29, 2015. 10:12 PM | 3 Likes Like |Link to Comment
  • Rite Aid Sells Out To Wallgreens [View article]
    Bruce, I share your feeling that $9 is somewhat low for Rite Aid, and it is possible that there has been some shenanigans. I think $10 would be a more reasonable offer, and $11 enough to shut down the most ungrateful loudmouth on the block.

    Until we receive a proxy that outlines the series of events that led up to the definitive agreement between the two companies, we cannot be sure that Rite Aid did not shop for better offers. In that it was not done publicly does not mean that it didn’t happen, and it is not uncommon for the adviser (in this case Citi) to solicit competing offers, or at least determine if there is interest. I will be somewhat surprised if this didn’t happen, because at $9, the BOD has to know that there will be many questions raised.

    That Rosen and Stull issued press releases means nothing. You can expect Willie Briscoe tomorrow, among others. They issue press releases for each and every buyout, because they are in the business of doing class action lawsuits. If one in ten of these stick, they make their money, and they will cut bait very quickly if they don’t get a credible lead plaintiff and also determine that there is a case. If RAD shopped, the case has no legs. If they didn’t shop, a competing offer may emerge, in which case the lawsuit becomes moot. As for WBA, I don’t think they are vulnerable here. If they got a tremendous deal, RAD shareholders have no claim against them, as they own them no fiduciary duty.

    The accelerated vesting of stock options and other incentives is another matter. It’s enough to make one ill, but I’m not going to think much about it, because I can’t change it. Wall Street is a filthy place where filthy deals are made. The SEC doesn’t care, because they know who is buttering their bread, and it’s not retail shareholders.

    Most of the shares in RAD are held by institutions, and the concentration amongst the top holders is quite skewed. T Rowe Price alone has over 10%. I haven’t looked for a while, but I am fairly sure you will find that fewer than 10 outfits own over 50% of the shares. So, however you and I feel is irrelevant here. Either they thing they are receiving something close to fair value, or they do not. The tendency with institutions is to take the money and run.

    The part about your article that resonates the most with me is about twisting numbers, although my take is not quite the same as yours. It is not long ago that management told shareholders that the turnaround phase is over, and now “growth, the fun part begins”. They bought Envisions and a bunch of clinics, and told us that the future is bright. While I understand that there are all sorts of pressures on the industry, nothing has changed appreciably since the time that we were given the rainbows and butterflies speech. So, that being the case, what would compel them to sell the company for something less than the 52-week high?

    We shall see how this unfolds. Likely as not, the deal moves ahead and the bluster of lawyers won’t matter diddly-squat. If RAD didn’t shop, then we may see an offer from ESRX. I think we’ll know fairly soon, though given the timeline for getting this done, it could take weeks (if it happens).
    Oct 28, 2015. 01:52 AM | 16 Likes Like |Link to Comment
  • Walgreens buying Rite Aid for $17.2B ($9/share) [View news story]
    I’ve been away from SA for so long that most readers here probably don’t know that I used to post frequently, particularly about Rite Aid. At first I stopped posting because my tablet didn’t get along well with the SA site. Then, after being away for a while, I realized that I probably had better uses for my time.
    Anyway, a friend who reads SA regularly sent me a note asking if I would comment, thinking that some people might benefit. I apologize in advance for any formatting issues. Like I said, my tablet doesn’t get along well with SA. Let it be known that I really did use paragraphs!
    First things first. I still have my RAD shares, and after the recent trouncing, figured that a buyout would emerge within 12 months or less. When they brought on a new BOD member with M&A expertise (former Lazard), it was hard to not get suspicious.
    I am disappointed with the $9 offer, though I will say it is substantially better than the $6.02 we were seeing this morning. It is atypical that an offer below a 52 week high would be entertained in a buyout, so I figured that $9.75 was the low water mark, and $10 would effectively shut down most challenges from shareholders who felt cheated. Sometimes it’s better to pay an extra $1 billion than fight nuisance battles. Apparently, the smartest guys in the room disagree with me.
    Anyone who thinks that we can “band together” and demand more is mistaken. A handful of institutions hold over half the shares. So, however they vote is how it will go. While it is not universal, institutions tend to take a “pay me now” approach to these deals, especially if they are holding a gain. Most of them are holding gains. The exception will be if they believe there is easy money left on the table.
    The BOD at RAD is weak and controlled by management. And, management is not shareholder friendly, but also very intelligent, especially on how deals work. So, it is reasonable to assume that they thought through the implications of taking this offer before doing so. In other words, there is probably no smoking gun that will indicate that they could have done better. In fact, we may learn that there was a go-shop period before the definitive agreement was reached, because this is common. If not, well then I do imagine that there is legal exposure here. As an aside, it will be interesting to see if management set themselves up to get positions at the new combined entity. Pessina is energetic, but not a young man. And, they are now in cost cutting more, which is something that Standley does well.
    There will be lawsuits, or threatened lawsuits, galore. But, if someone had offered $15, there would still be lawsuits, because these class action outfits issue press releases for absolutely every buyout, always hoping that something will stick. So, just because you see press releases, don’t make much of it. (Prediction: Willie Briscoe issues a press release by Thursday.) There has been some mention here about fiduciary duty around the shareholder proposal that would have limited some ill-gotten gains for relating to a change of control. I think that’s a legitimate beef. However, even if that kind of lawsuit were to gain some tractions, I’m not sure that it would benefit shareholders. Rather, WBA would likely just have to pay less upon closing. Heads they win, tails you lose.
    Will this deal clear regulatory scrutiny? Almost for certain. There is actually less overlap than most people imagine, and I have seen professional analyses that demonstrate this. Just because you happen to live near both a Rite Aid and Walgreens, don’t assume that is how the rest of the country looks. And, for that matter, having overlap is not really a regulatory issue, provided there is adequate competition. So, if WBA and RAD are across the street from one another, but there is a grocery pharmacy or CVS within a block, it’s moot when it comes to competitive issues. There are a few states where RAD has substantially more stores than WBA, and several states where RAD doesn’t operate and WBA has a lot of critical mass. Take Florida and Texas alone and you will see what I mean. On top of this, you have mail order and so on, so there will be a lot of sabre rattling, but probably fewer than 500 stores required to close. That said, they are going to fold together some stores over the next 2 years so as to gain efficiencies. CVS is likely going to pick up some of what is disgorged, and this is a good opportunity for them to get some traction in states where they barely exist.
    Since a definitive agreement has been signed, there is a break-up fee in both directions. Nobody yet knows how much, and that may matter. If RAD did not shop the company, then a competing offer could emerge.
    It won’t be from CVS. They have more overlap with RAD than WBA, so less to gain and potentially more regulatory headaches. Besides, they will get some of the more lucrative discards from the WBA/RAD combination. Furthermore, they’ve just done some acquisitions, so probably don’t have the financial ability to swallow something this size quite yet.
    I used to say KR could be interested. But, they are not the sort of company to get into a bidding war, let alone a hostile one. So, scratch that idea.
    The only plausible opposing bidder is ESRX, and unless they were already shopped. Not only is there historical bad blood between ESRX and WBA, but more importantly, this deal puts them in a dismal competitive position, becoming the bride left at the altar, so to speak.
    Whether or not WBA intends to mimic the CVS model remains to be seen. I have some doubts around that, and unlike some other observers, don’t believe Envision had much to do with this purchase. It’s small and works the middle market, so Envision is not really a competitor with Caremark and ESRX in that regard. However, this deal still keeps ESRX from competing with CVS as a hybrid, and that model has definitely been working well for CVS as of late. Buying RAD was the only means to possibly competing on that level.
    Either way, this deal gives the combined WBA/RAD quite a bit more leverage when dealing with all 3rd parties. So, ESRX has to be feeling uncomfortable at the moment. They aren’t going to collapse overnight, but many people who make a living out of analyzing this sector say that the PBM model is not going to survive over the long term, because they are middle men who add no intrinsic value. Either the pharmacy chains take over that role, or insurance companies do (e.g.: United Health).
    For now, I’m in a do nothing mode. If no new buyers materialize, I’ll hold until I get my $9, since I have no particular reason to cash out early. The current spread is giving you a better than 10% annual ROI for waiting, which in my case is a long term capital gain. If a better offer emerges, all the better. I have to say, I would have preferred to receive WBA stock instead of cash. I already have some, but I think this is going to be a very lucrative purchase for them, especially since they are effectively stealing at $9. In an all stock buyout, you don’t have to pay any tax until you sell the shares you get. In a cash deal, you are on the hook for a capital gain. So it goes.
    One last thing. The reason that WBA plans to operate RAD as a subsidiary for a time is most likely tax related. Rite Aid has a huge NOL carryforward, and preserving the entity likely preserves the asset. Otherwise, it gets characterized strictly as an asset purchase, and the NOL asset evaporates. Okay my good people, over and out. It’s unlikely that I will post again, and I may not even see any of your comments. The exception is if a competing offer emerges, because then there is more to talk about. I’m not holding my breath on that one.
    Oct 28, 2015. 12:38 AM | 5 Likes Like |Link to Comment
  • Rite Aid: The Little Engine That Tries [View article]
    Popeye, I am fairly sure that there is nothing prohibiting Rite Aid from selling or simply ceasing the production of ice cream. It is popular with a certain following. I think it's one of those things that they don't see as propelling the company ahead, nor necessarily hurting it.
    Jul 29, 2015. 02:22 AM | Likes Like |Link to Comment
  • Rite Aid: The Little Engine That Tries [View article]
    RichOside, it is not that difficult to ship ice cream, although it is often less expensive to contract with another plant to make the ice cream in a location that is geographically advantageous. One reason that the ice cream is not sold in the east is that nobody knows about it. It would require expensive marketing to gain brand acceptance, which is not really the kind of thing that Rite Aid needs to be focusing on at the moment. Furthermore, the stores would have to make space and build out the service area for the ice cream. There are many other places and ways to spend capital at the moment.
    Jul 29, 2015. 02:20 AM | Likes Like |Link to Comment
  • Rite Aid: The Little Engine That Tries [View article]
    It’s useful to think broadly, and I won’t fault anyone for suggesting that a company come up with something that changes the game. Interesting exercise.
    Facts matter. Some have already pointed out that Rite Aid (formerly Thrifty) has been selling ice cream for decades. As a few here have suggested, when you visit 3 stores out of 4,500, you are likely to get a distorted view of the world. I’m sure that in some of those stores, the ice cream is a distraction rather than an amenity. In others (and I have visited them), it is a popular feature and doesn’t keep customers from getting through the checkout. It comes down to having enough foot traffic to justify adequate staffing, which some would argue is a chicken/egg conundrum.

    Continuing with the fact check, in no particular order, it is untrue that all of the former Fred Meyer executives have left the building. Ever hear of John Standley?

    Calling EnvisionRx a “managed care division” is inappropriate. EnvisionRx is a PBM and specialty pharmacy. They serve the small to middle market, so do not currently compete with the big PBMs. So, to suggest that EnvisionRx needs to “find a niche” is wrong, and suggesting that Rite Aid consider growing specialty pharmacy ignores the acquisition that they just completed. No offense intended, but it appears that you do not have a particularly strong grasp of the company that you are analyzing.

    Sam’s Club a fearsome competitor? I hope that part of the article is sarcasm.

    Now for the parts where the facts may be correct, but the interpretation not the same as mine.

    Rite Aid does not need to find a game changer. This is drugstore retail, not handheld technology. A significant majority of customers choose their pharmacy based on location, and once they do, they are not likely to switch without a lot of prompting. That prompting usually comes in the form of a negative event (repetitive poor service), or the pharmacy not accepting a particular type of insurance. The rest of the store is there for convenience, and people will often purchase something from the front end if they are picking up a script, or if they just happen to need something and the drugstore is the closest place. It’s how 7-11 has built and maintained a business: being in the right place, being open, and having a small footprint that allows one to get in and out quickly. To that end, as Popeye points out, it is key that a customer is able to get out quickly. Other than for shoplifters, having a cashier is helpful.

    Drugstore retail has done well for several years, and there is at least some evidence that suggests that it will continue to do well, due to demographics, among other things. So, in that it’s not a zero sum game, Rite Aid does not need to steal customers from Walgreens or CVS in order to succeed.

    As it stands, there has been no evidence presented that suggests that any of the national drugstore chains have taken business away from one another for a few years. They are all growing, although it is worth noting that Walgreens’ front end has been shrinking for a very long time. The greatest losers are the independents, who will have a very hard time surviving under ACA, among other factors. The next losers will be the grocery and discount chains, which is why Target punted. It is becoming increasingly unaffordable to run a drugstore as an afterthought.

    The article shows that Walgreens has much better sales per square foot than Rite Aid. This is well known and not going to change any time soon, although it is worth noting that Rite Aid has increased their sales per foot in the past few years and Walgreens had actually decreased.

    What is important here is to understand the reasons for the sales differential, rather than assume that Rite Aid is a weak marketer, has higher prices, or fails to tantalize the shopper. It’s about location, which as I said earlier, is the primary criteria that shoppers use when choosing a drugstore. While Rite Aid has been consolidating their store base for years and slowly closing the worst locations, Walgreens has the best locations in the country, and nobody will ever catch them in that respect.

    Keep in mind that drugstore leases are generally for 20 to 30 years, but some extend 40 years. So, if anyone is thinking that the solution is for Rite Aid to close all of the weak locations and initiate new leases on prime corners, they can think again. It is a slow process, waiting for poorly located leases to expire, or in some instances agreeing to pay for a dark store rather than lose money from operating a bad location.

    As an aside, it should be noted that Walgreens has had a very long time strategy of opening stores on the corner of “main and main”. This has driven great foot traffic and high sales. Unfortunately, there is a downside, which is very high fixed occupancy costs. The new management has a revised strategy, and they have been openly critical of the old strategy. The current push is to cut costs, and while there is no way to exit most of these long term leases, they have gone about cutting store personnel in an attempt to emulate their competition. A recent analysis by Credit Suisse holds Rite Aid out as the low cost model, with CVS next. It has been suggested that Walgreens needs to do what they can to move closer to that model. I know it sounds wild to those who believe that Rite Aid should have more personnel, rather than Walgreen needing fewer, but that is precisely what is being discussed “out there” in the land of corporate profit. I’m not going to get into the customer service part of the conversation here, other than to say that quality probably matters more than quantity.

    My only other comment on the article has to do with the suggestion that Rite Aid should purchase a regional drugstore chain and then let regional the management take over at corporate. That is paraphrased, but I believe I have the concept captured here. I seriously doubt that those running regional chains have the experience to operate a national chain. If they have a great concept, then it is easier to simply copy it, or if needed, poach a few key personnel.

    Apart from anything said in the article, I am fairly confident that there is a lot more going on than meets the eye with respect to problem solving in this business. I can list a number of complaints that I have with those running the show. But, to their credit, they have done a lot right, and they continue to try a variety to things to get some advantage and create loyalty. They are operating on a shoestring budget and continually being pushed by reimbursement pressure, so it is a balancing act. I think the EnvisionRx acquisition was a bold and positive move, even though it will drag on earnings for the remainder of the year. I like the resume of the new operations VP, but will need to see what he does before saying much more. Rite Aid is making investments that will probably pay off, but not immediately. So, anyone thinking that earnings are going to double in a year should move along. That said, I think that those who understand the business see where Rite Aid is headed, which is why there is often M&A chatter.
    Jul 29, 2015. 02:14 AM | 2 Likes Like |Link to Comment
  • Why Freeport-McMoRan's Oil And Gas Business Is Primed To Get Better [View article]
    Ah, contrarianadvisor, we meet again. You have another six months before time is up for your $20 WTI prediction. So, far, it has been moving in the opposite direction. I think I'll end up being right on this one, but there is still time...
    Jun 24, 2015. 09:36 PM | Likes Like |Link to Comment
  • Freeport McMoRan Oil & Gas files for IPO [View news story]
    So, FCX is doing exactly what they said they would do, and people are surprised and upset?

    If you are annoyed that they bought O&G, then fine. If you think they should get rid of O&G, then fine. But, when they do an IPO of O&G to generate some cash with the prospect of either using it to increase production or reduce debt, it would by hypocritical to chastise the company for it.

    Mistakes were made. I didn't own FCX at the time, but I think shareholders should be annoyed about it, because the deal was improperly priced. I simply don't see any mistakes being made now, or over the past year. I care about what happens next, not what happened before.
    Jun 24, 2015. 09:32 PM | 4 Likes Like |Link to Comment