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Rite Aid Post Mortem

Apr. 09, 2018 5:17 PM ETRite Aid Corporation (RAD)362 Comments
Phil Anthropy profile picture
Phil Anthropy


  • After a massive bear raid, the merger with Albertsons may destroy Rite Aid shareholder value.
  • The impending merger agreement is little more than a dilution and reverse split.
  • It is unlikely that much can be done to prevent it.

[Important Note! This article contained a mathematical error that has invalidated some of its content. The Albertsons IPO attempt at about $1.7 billion was only for a portion of the company, not the whole thing. See the comments for further discussion. - Author]

In a previous article I described Rite Aid (NYSE:RAD) as a "hold." Based on new information, or rather, based on information I had seen before but which hadn't registered, I have changed my opinion and now believe that RAD is a sell. I reached an erroneous conclusion earlier, because of a "red herring" in the announcement of the merger between RAD and Albertsons.

The red herring was the choice of cash or stock for a portion of the buyout, as reported by the New York Times. "Rite Aid shareholders would get $1.83 in cash and one share of Albertsons stock, or 1.079 shares of Albertsons stock, for every 10 shares of Rite Aid they owned."

Companies sometimes give shareholders this kind of offer during stock splits. Under normal circumstances the cash and the fractional shares are roughly equal. If they weren't, then all holders would opt for the more valuable choice, and there would have been no reason to offer the two alternatives in the first place. The stock choice may be pegged slightly more valuable, because that gives holders an incentive to take the stock and thereby saves the company out of pocket cash. Based on those assumptions, it appeared to me that $1.83 was equivalent to .079 shares of the new company (newco) stock, meaning that the stock price would come out around 23. That now looks like a mistake.

Floating in the swamp of information about the merger is the following, from Forbes, "leaving Rite Aid shareholders with ownership of between 28% to 29.6% of the

This article was written by

Phil Anthropy profile picture
I am retired from government service after a career in administration and computer management, most of it spent overseas. My academic background includes a master's degree in computer science. I have over 30 years investment experience. Since my retirement I have become a more active trader in both stocks and options. My major strategy for gradual profits has been to buy solid stocks (mostly tech sector) in trading ranges, and then to sell one month covered calls. I also sell at-the-money short puts on beaten down stocks. Using real-time quotes and charts, I make occasional trades based upon price or volume acceleration. I do most of my short-term trading in an IRA, which reduces record keeping and defers taxes. My goal is eventually to generate enough profits to permit significant philanthropy. An alternative would be to work for a charitable or philanthropic organization, which I am considering.

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