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RITE AID:  GAME OF THEORIES

|About: Rite Aid Corporation (RAD), Includes: AMZN, BUFF, FRED, GIS, WBA
Summary

Scene 1:  Tyrion Lannister vs The Mountain in a Trial by Combat.

Scene 2:  The Iron Bank of Bezos, Littlefinger, and the faceless men.

Scene 3:  Join the Night King to seize your victory.

Winter has come to the investors of Rite Aid (RAD). How much time, energy, and hope have been wasted over the last year in anticipation of the mythical buyout?  Month after month of waiting for something positive to develop has ultimately led to despair, culminating in the most disappointing of mergers since the stock market was conceived.

Tyrion (Rite Aid Investors) Vs THEMountain in a Trial By Combat:

Many small investors look for those "sure thing investments" with minimal risk in order to squeeze a tiny profit from the market.  Not too many people can afford high flyer stocks over $100/sh like Amazon (AMZN), Netflix (NFLX), Tesla (TSLA), Nvidia(NVDA), etc. simply because they think they can't afford them.  These people look for stocks under $10 or penny stocks to test their mettle in the stock market.  Usually, when an M&A situation pops up, Company A is buying Company B for a premium to its normal price and the pre-merger price is a few cents below the buyout price.  For example General Mills (GIS) purchase of Blue Buffalo Pet Products (BUFF).  Not so much for Rite Aid.

ROUND 1:  Flashback to end of January 2017 when Walgreens (WBA) was supposed to finalize their deal to buy Rite Aid for $9 which was trading around $7/share.  It looked like a "too good to be true" $2/profit in a couple weeks.  Only the extremely naïve believed that would actually happen but it turns out that was just stage one of this rope-a-dope scheme.  Certainly, more than few people made an initial foray at that time, just a long shot bet, with their "gambling" money.

...Gut shot, jab to the nose, slap, slap, slap, wake up call...

Tyrion:  "Wow,  this isn't going to be as easy as I thought.  Looks like they're gonna put up a fight.  No worries,  I got this!"

ROUND 2:  To appease the FTC, Walgreens agrees to sell 1200 stores to Fred's (FRED) (a.k.a. fresh blood) and reduce the buyout price to $6.50/sh.  This seems reasonable. Lo and behold, Rite Aid stock price falls to under $4/sh and the Tyrion-esque investors begin licking their chops.  If a man has been paying attention and time things right, a man can double a man's money when the deal gets approved at the end of June.  This is almost like free money they are about to give away!  The FTC can't possibly nix this deal.  Most people get their drugs from Walmart (WMT) or the grocery stores anyway there is no monopoly here.  Quick, go tell a man's family, friends, and neighbors so they can thank a man for eternity for solving their financial problems.

ROUNDHOUSE, HAYMAKER, UPPERCUT, KNOCK DOWN...

...1...2...3...4... hazy, dreamland, punch drunk...

Three eyed Pessina:  "Sorry guys,  There will be no merger.  We are going to pull the deal because someone may have overheard that 1 of the 2 directors of the FTC may think this merger may not be in the best interest of the American consumer.  Since we already have pharmacies across the street from most of the Rite Aid locations we were going to acquire anyways, we have opted to give Standley and Co enough cash to pay off the remaining debt that will be left over after the banks and bondholders are finished shorting the stock to $2 from $7." 

...five...six...seven.... struggles to feet. fogginess clears up...

Tyrion:  "Wait there is hope!  They have signed an Asset Purchase Agreement!  Walgreens is paying $5B for half of the stores.  Simple math, Rite Aid remainco is worth more than $5B + EnvisionRx.  A man can still salvage about $7/share out of this deal.

THEMountain:  "Grrrrrrrr"    

ROUND 3:  Walgreens and Rite Aid enter an Asset Purchase Agreement and Rite Aid stock plunges under $1.50/share in September of '17.  This is odd because Walgreens is paying more in cash for less than half of the remaining assets of the enterprise. Rite Aid will be a $22B revenue Fortune 125 going concern with manageable debt and this valuation is way out of line with any bell curve.  But wait there's more!  The FTC, instead of letting Fred's take over 1000+ stores, save thousands of employee jobs, protect US consumer choices, and let Walgreens get paid a billion plus dollars for them; agreed to let Walgreens close of 600 of them.  HUH?  Good thing investors are almost blinded and punch drunk from the beating they took in Round 2 because hope springs eternal.  Certainly the cavalry is on the way to pick up the scraps of the cheapest going concern in the stock market.  Where are the Knights from the Shire of Berk? The Bezoskers of Amazon?   

....BODY SLAM, SLASH, KNOCK OUT, DOUBLE EDGED SWORD BEHEADING...  

Alas, as it turns out, Rite Aid Investors have been betrayed by Mad Lord Standley.  He has made a back room deal with Cerberus, the three headed hound that guards the gates of hell to keep the dead from escaping. The rotting carcass that remains of Rite Aid investors' hopes will be sealed away for eternity under an unsurmountable and continuously growing heap of debt excreted from the bowels of the Cerberus beast.

Tyrion:  {severed head gurgling blood croaks out last gasp}  "VOTE NO! VOTE NO! VOTE NO!"

THEMountain:  {Raises battle axe in triumph}

End Trial By Combat Scene

THE IRON BANK OF BEZOS

ARROW 1:  The state of retail is in shambles.  Amazon, which is really just the stock market proxy for e-commerce, isn't concerned with generating profits as much as it is concerned with having a hand in every financial transaction made.  The market leads us to believe that they are the figurehead for market disruption when, in reality, their success is derived from people being more efficient LAZY.  Why waste your time driving around and shopping when you can just get on your computer and let somebody bring you what you want?  Amazon isn't so much disrupting the market as they are taking advantage of changing retail consumer trends.

ARROW 2:  Slippery Slopes

Chart
RAD data by YCharts

It certainly appears looking at this chart that the fate of Rite Aid was determined about mid-January 2017. It's stock price has plummeted ever since even though the company has unveiled several plans to merge, sell assets, pay their debt, or otherwise right the ship.  News that would see other companies stock prices double seems to fuel the downward spiral of Rite Aid.  The market just doesn't care about Rite Aid for some underlying reason. The average investor looks at the company and sees a comparatively good value investment opportunity with the share price at 5 Year lows. It begs the question, what was the market being told that the average investor wasn't?

Arrow 3:  There exists an apocalyptical problem that must be addressed soon by our nation's leaders.  There are 1000's of malls, stores, outlets, etc. scattered across our nation that people just aren't going to anymore.  These places have leases and mortgages that must be paid, people who must be employed, and Rite Aid, among others, is not an insignificant participant.  The current reality of pharmacy land is that where there is one the other two, be it Rite Aid, CVS, or Walgreens, are never too far away. This fact is so blindingly obvious that Walgreens buys 1900 Rite Aids and immediately announces closing 600 of them.  Somebody has to lose the retail pharmacy expansion wars and the loser is Rite Aid.

Arrow 4:  What is the most fair solution to this predicament?  It becomes increasingly evident that Rite Aid needed to be sacrificed in order for its siblings to survive with the impending onslaught of the white walkers in e-commerce.  If the Iron Bank was aware of this eventuality, then why not figure out a way to make a buck or two facilitating the process?  Sounds crazy, right?  So why is Walgreens not screaming bloody murder as they finish paying off $4.7B in cash for less than half of Rite Aid to impede a significant competitor from paying $.18B for the rest of it?  The disparity is telling. 

Tyrion's severed head...  "I thought they said we were getting $2.50/share?"

...SLAP, PUNCH, STAB, SWOOSH, UPPERCUT...

"YOU'RE GETTING 18 PENNIES, $14B in DEBT, AND....

YOU'RE KEEPING STANDLEY!"  

Arrow 5:  So why would Walgreens agree to buy any of Rite Aid?  Why not just let them suffocate under the weight of their own debt and pick up the pieces they wanted in bankruptcy?  At the moment, Three Eyed Pessina isn't looking like the brightest raven in the roost with Littlefinger Quayle and the King in the North, John Snow, out-negotiating him 26 to 1 with a PBM and corporate headquarters thrown in to boot.  Excellent question,  perhaps we find out next season.

Arrow 6: If a man wanted the price of his stock to increase and had a woefully underwhelming buyout offer in one hand and a payoff of $3.5B in debt in the other.  Which hand would a man show first?  Perhaps a man is no man at all, perhaps he is just a pawn in game that needs to be played out.

Join the Night King and seize victory from the bloodied blade of defeat 

Well it looks like this season is over but we still need a cliffhanger ending to get us ready for next season.  The game being played has more going on behind the scenes then we may ever be privy to but at least we can position ourselves for what sure looks like is being put into place.

On one hand, we have a $83B behemoth retail enterprise in the debt bloated Fat Albertons which Rite Aid investors are either being forced into owning or are graciously being allowed to participate in, depending upon a man's viewpoint.  Each share of the new company comes with an ice wall sized mountain of $30 in debt straight up from the get go.  Perhaps this could be a wonderful long term investment in the bread and butter world of, well, pottage and mutton.

On the other hand, you have a decades proven mis-management team who have succeeded in plummeting and pinning the market cap of a fortune 100 $32B revenue enterprise and selling them for essentially $180M in the midst of the greatest and longest bull market the world has ever known.  

I say go with track records.  I say enjoy each pitiful earnings report, the mounting losses, and insurmountable debt in an increasing interest rate environment by profiting off of every ill-advised move they make and watching them get swallowed by the quagmire they are creating.  Long swords are a difficult weapon to master so pick up a short sword and fight with the NIGHT KING!    

Disclosure: I am/we are long RAD.

Additional disclosure: Not Long Rad for Long