Entering text into the input field will update the search result below

Rite Aid's Plan Is A No-Go


  • The management team at Rite Aid announced plans to buy back a significant amount of debt in order to lower annual interest expense.
  • The particular debt the firm wants to buy back makes for an excellent target, but there's a major catch.
  • The current price of these particular notes, even before the tender, makes this transaction highly unlikely to succeed.

After management at Rite Aid (RAD) announced that it was going to merge with Albertsons, I didn't think any big developments would come along for the drugstore chain. I was dead wrong. On February 27th, the management team at the company announced plans to buy back up to $900 million worth of long-term debt in order to reduce leverage and lower annual interest expense. As a rule of thumb, I am supportive of debt reduction, especially when it involves higher interest-rate debt like Rite Aid's, and when I first saw the announcement, I believed it was a brilliant step forward. Now, though, after reviewing the data, I believe this tender is a non-starter.

A great idea to reduce debt

Often times, when I see companies push to pay down debt, I see them make the mistake of paying off low-interest debt with (usually) near-term maturities. This typically takes the form of revolving credit facilities. In some cases, like where the lender may reduce the firm's borrowing capacity for some business-specific reason, such debt reduction is a necessary evil, but in others it's nonsensical. Rite Aid, at first glance, appears to be avoiding this at least in part.

*Taken from Rite Aid

As you can see in the image above, the drugstore chain is offering to buy back from investors three different classes of Senior Notes: 9.25% ones due in 2020, 6.75% ones due in 2021, and 6.125% ones due in 2023. In all, these issues come out to $3.51 billion, but this isn't the full amount Rite Aid is able or willing to cover. Instead, the firm intends to allocate approximately $900 million to these buybacks. Unlike in many cases I have seen in the past, where the issuer assigns tiers of priority to different notes, Rite Aid intends to treat these three issuances on a pro rata basis. That means that if all $3.51 billion worth were tendered, for

This article was written by

Daniel Jones profile picture

Daniel is an avid and active professional investor.

He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (57)

Captain America profile picture

RAD is required to offer to purchase like kind debt of the different tranches of senior notes
under the same terms. If no one tenders RAD to buyback debt, then RAD is free to call for redemption, in whole or in part, any particular senior note issue at its choosing.

RAD would prefer to simply call for redemption the $897M debt with the 9.25% coupon due March 2020 and simply leave the lower cost debt in place. However, it needs to give the holders of the other two senior issues of lower cost debt the opportunity to tender their bonds. RAD is required to first pay down all the bank related debt ($3B+/- of line of credit / term loans) with the sales proceeds. What is left ($1B+/-) is available to pay off bonds.

All the debt covenants under the bank debt and bond indentures severely restrict RAD's ability to use any of the sales proceeds from major asset sales for really any other purposes other than to pay down debt. No dividend payments are allowed from any of the sale proceeds.

After the sale to WBA, I was expecting RAD to restructure its debt structure by issuing new debt to spread out the debt payments and maturity and redeem the old bonds --- particularly the $1.8B due in 2023. This was before the Albertson's deal was announced.

Not sure that will matter..

all the best.
If you disagree I give you Liberty Media buying IATV.

Never heard of it right?

IATV had a console and a camera in NASCAR cars during races.

The one trick pony company had the idea that for a fee you could decide which driver you wanted to see from inside his car on a special set top box on your TV.

Liberty Media signed a definitive agreement to pay $1.55 per share and then the deal dragged on...

And there IATV sat until I bought 55 cents. A call to both home offices and yes - the deal was going through.

So shares were bought and tendered in 2004 - 2005 and the deal closed at $1.55...

so much for efficient market theory.

and that is how time and again the small outside minority investor loses.

This deal will close in my view and I hope to collect a second call premium reducing my cost again to own and tender the equity.

Don't shoot the messenger.
ziaakbari profile picture
no vo 20k
RAD has and will continue to be a train wreck. Company / government screwed over stock holders and turned this stock into garbage.

All that is left is trades of this stock on big dips or when it can latch onto a sector bump - not of value long-term
ziaakbari profile picture
no vote for sure 10k
c.eng profile picture
02 Mar. 2018
The par offer was mandatory using asset sale proceeds post credit facility debt pay down, as per the indenture for the 2020, 2021 and 2023 notes. Nobody in their right mind will accept, but it was mandatory nonetheless. You should do some reading on bonds and covenants if you are going to write on the subject.
SeattleGoldMiner profile picture
AND, the merger will trigger the "change of control" put for certain note-holders (i.e. the June 2021 at 101%).. so they are not in a hurry to tender right now.
reply to c.eng

Good point ---the par offer is mandatory.

It would seem on the surface that nobody would accept this offer, but some large investors who hold these bonds might be changing their views about RAD and its management as this is happening. Perhaps they might want to cash out of RAD bonds, while there is a chance to do so.

Since you seem to know a lot about bonds, if you were holding --let's say $40 million of one of these 3 issues---and you might want to dump them in the next year----what kind of a bid do you think you could get for them. Would a bond trader offer you par, something more than par, or something less?

Many types of debt never were liquid before 2008. Since DoddFrank kicking the banks out of bond trading, these markets are less liquid than ever.

Do you know what kink of "liquidity" exists in RAD debt issues??? Do you trade them frequently????
c.eng profile picture
05 Mar. 2018
'20s are currently bid at $101, and it looks like you could sell good size there.. they are callable at par 3/15 but won't be called until after the mandatory par offers so guys are clearly assuming they stay out a bit longer

'21s are bid ~$101.875, again looks like you could sell in size there. I expect them to be called at the 6/15 call date at $101.688

'23s are bid ~$101, I expect them to be called at the $104.594 price at close.

The question to me is the probability of this closing. I think it most likely gets done, but don't have strong conviction. If it broke the '20s and '21s would both get taken out at the same prices, but the '23s probably trade back down towards $90.

The RAD bonds have been quite liquid. You easily could have built a $50mn+ position in the '23s over the past few weeks.
This is only my opinion, but since the RAD saga has gone on for so long and disgusted many investors, there is a pretty good chance that a major financial media company is working on a story about the merger. Someone mentioned a WSJ reporter might be interested. It's always possible the Barron's is working on it too.

I would keep tuned on this to see if some financial journalist goes the extra mile to investigate the circumstances here and tell more of a story of how RAD and Albertsons got to this point. Could also be Fortune, Forbes, possibly FT.

(Heaven forbid if they are relying on Krol as a source. He might tell them the $9 offer WBA made for RAD was too low.)
ziaakbari profile picture
no vote for me
papayamon profile picture
Surprised that the author hasn't weighed in on the ridiculous deal that will cheat shareholders while benefiting the CEO. Daniel, are you blind?
papayamon profile picture
And reading through your other articles about RAD, how could you possibly except a sale price for this value when a few weeks ago you were telling the real value of Rite Aid was a sale to Amazon? That's an amazing change of direction and it undermines your credibility as a writer.
papayamon profile picture
Would you care to address that this "game changing merger" has RAD stock priced at $1.80? What's the game? Your article is an amateurish joke, so there's no wonder you don't respond.
Lucrum Nunc profile picture
Double down tomorrow and you're at 2.25 :-)
istackchips profile picture
Feels good to be a new bag holder of this pos at $2.60.
Lucrum Nunc profile picture
Komat, thanks, accurate and to the point. Ironically, RAD's super regional w/ lower debt plan is rolling out on tract. Without the ABS offer in play RAD stock would be on a uptick.
papayamon profile picture
Meaning without the CEO trying to steal the company in conjunction with a PE firm, this would be a recovering stock. I'm in full agreement with you.
9.25% notes can be called on 15 Mar at par. 6.75 % notes can be called on Jun 15 at par. This is why the tender is only for $900 million - so they'll have enough left to retire those notes in future required tenders.
I am voting a big no on the buy out .they are shafting share holders big time
Crap Aid management & BOD are really good at screwing over share holders.
If this get pass in this form is total robbery to share holders.
The only thing that will happen when Albertsons IPO goes through is that PE will get a special dividend and cash out.
The new company will have such much debt that in a few years it will go under.
They will say its Amazon effect part of it, greed from management will leave people out of jobs, underfunded pensions and people with no stores to buy from.
Thats what well get from an Albertsons IPO just wait to see this happen !!!
01 Mar. 2018
Not sure about what RAD management plans are but I think thesis of this article is wrong.
At least 2 of these bonds are callable (I couldn't find the 3 one on Finra website) so whether current owners want to sell or not these bonds could be called on a regular basis. In fact the next date when one of the bonds can be called (767754CD4) is 3/15 and call price is $100 which is why you will not see this bond trading much above that price.

Do you know if the call provision means that they are permitted to retire a limited percentage per year and they use a lottery to select which holders must redeem debt?
The saga continues into year 3..
longnose profile picture
knowing RAD management - there is close to 100% chance some malfeasance will be done - to screw RAD to benefit management - even in bond buy back. It will only go to prove what is already known - change management, BOD. Only good news should be cash at hand should yield something to offset - lack of losses :-) which is win/win
papayamon profile picture
I still think we're going to have a better offer. Could come at any time
papayamon, what makes you think there is a better offer coming? At any time?

What will happens to the Rite Aid 7.7% 2027 bonds? New company assumes them? Or what?
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!


SymbolLast Price% Chg
Market Cap
Yield (TTM)
Rev Growth (YoY)
Short Interest
Prev. Close
Compare to Peers

More on RADCQ

Related Stocks

SymbolLast Price% Chg
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.