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Business

Rite Aid, Albertsons call off merger deal ahead of vote

Grocery store chain had planned to buy drugstore chain's 2,500 locations, but concerns about shareholder approval shelved proposed deal.

A Rite Aid location in Philadelphia is shown

A Rite Aid location in Philadelphia is shown in this Oct. 21, 2016, photo. Photo Credit: AP/Matt Rourke

Rite Aid shares plunged Thursday as the company headed into an uncertain future after calling off its merger with the grocer Albertsons.

Analysts and retail insiders questioned the drugstore chain's prospects after it ended a planned takeover by Albertsons before Rite Aid shareholders could vote on it. That vote faced shaky prospects due to opposition from shareholders and influential proxy advisory firms.

Rite Aid chairman and CEO John Standley said in a prepared statement that his company would continue to "build momentum" for big parts of its business like its renovated stores, expanded pharmacy services and its customer loyalty program. Rite Aid also said its board will consider governance changes, although it did not elaborate.

The company also has a pharmacy benefit management, or PBM, operation that runs prescription drug coverage and diversifies its business. But Rite Aid is down to around 2,500 stores mostly on the East and West coasts after selling nearly 2,000 to bigger rival Walgreens Boots Alliance Inc. And it doesn't operate one of the nation's largest PBMs like another competitor, CVS Health Corp.

Rite Aid Corp. has neither "the scale nor the balance sheet to compete with much larger and well-capitalized rivals," Moody's vice president Mickey Chadha said in an email.

The Camp Hill, Pennsylvania-based company has struggled with high debt levels and tough competition, as narrowing drugstore networks have pushed customers away from its stores. Earlier this week, it chopped its fiscal 2019 forecast because generic drug pricing also wasn't shaping up how it expected in April, when it first laid out expectations.

A deal with Albertsons, owner of Safeway and other grocery brands, would have helped Rite Aid by creating food and drugstore combinations, and it would have given the chain better access to financial markets for things like opening new stores or improving existing ones, said Burt P. Flickinger III, managing director of the retail consultant Strategic Resource Group. Flickinger has worked with both companies.

He said Rite Aid needs a large investment to help shift its store inventory toward more health and beauty products, like Walgreens and CVS have done, and away from low-margin items like cigarettes that also are prime shoplifting targets.

Flickinger said the Albertsons deal may have been "the last, best, and final opportunity for Rite Aid's longer term viability."

Shares of Rite Aid fell nearly 11.5 percent Thursday to close at $1.54, the stock's worst sell-off in a year.

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