It was a bad deal, Rite Aid shareholders said – so the Albertsons takeover fell apart

Here’s a sneak peek at the new Albertsons store on Broadway Avenue in Boise

The new Albertsons on Broadway Avenue has two stories, fresh-baked goods made from scratch, cheese made from scratch or carved in the store from blocks, an upstairs bar and dozens of other features Albertsons is trying out for the first time.
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The new Albertsons on Broadway Avenue has two stories, fresh-baked goods made from scratch, cheese made from scratch or carved in the store from blocks, an upstairs bar and dozens of other features Albertsons is trying out for the first time.

The Rite Aid pharmacy chain called off its proposed merger with Albertsons, the Boise grocery retailer, the night before Rite Aid shareholders were to vote on it Thursday.

Here’s a look at what happened and why, and what it means for Albertsons’ customers, employees and owners, and for Rite-Aid.

What happened?

Albertsons and Rite Aid announced the merger in February. The deal was supposed to solve several challenges facing the two old-line companies in a retail landscape that is being turned upside down by consolidation, bankruptcies and rapid digital innovation.

Albertsons Companies offered either a share of its stock and $1.83 in cash or slightly more than one Albertsons share for every 10 Rite Aid shares. Rite Aid shareholders would have owned 30 percent of the combined companies.

One of Rite Aid’s biggest shareholders, Highfields Capital Management, said deal was “in the best interests of Albertsons and Rite Aid management, but not Rite Aid shareholders.” The investment firm said in June that it would vote its roughly 47 million shares against the deal.

Two prominent proxy advisers recommended that shareholders vote against it. One of them, Institutional Shareholder Services Inc., said in late July that it “does not appear that Rite Aid shareholders would receive a fair ownership interest in the combined company.”

But Albertsons refused to offer more money.

Albertsons, in a statement, said it disagreed with “the conclusion of certain Rite Aid stockholders and third-party advisory firms” that the deal undervalued the drugstore chain.

What does the dissolution mean for Albertsons customers?

Albertsons would have rebranded its in-store pharmacies under the Rite Aid name and would have continued to operate some stand-alone Rite Aid pharmacies, including a Rite Aid across the intersection from Albertsons’ flagship store at 16th and State streets in Boise.

That won’t happen now. Those stores won’t change.

Foot traffic to the in-store pharmacies was supposed to help Albertsons raise the number of customers walking through its food aisles, increasing the chances that they would buy a banana or a rib-eye steak on their way out.

Albertsons said it will stick with practices that serve customers while boosting profitability. It has been upgrading Idaho stores and plans new ones in Boise’s Harris Ranch area, Meridian (two stores) and Star.

“We ... have continued to differentiate ourselves through our best-in-class “Own Brands” portfolio that is expected to add over 1,100 new items this year as well as through our expanding eCommerce offerings, which grew 108 percent year-over-year in the first quarter,” the company said.

“We are confident that our 275,000 dedicated employees will continue to execute on our business plan to enhance our customers’ experiences and lead the grocery industry with new innovations.”

Albertsons Barber Valley2.jpg
Albertsons is investing in Treasure Valley stores now more than it has in two decades. This artist’s rendering shows the proposed Albertsons store at the southwest corner of ParkCenter Boulevard and East Warm Springs Avenue in Boise’s Barber Valley. Provided by the city of Boise

What does it mean for Albertsons’ owners and employees?

Founded in Boise in 1939, Albertsons grew primarily throughout the western United States. The struggling company sold most of itself in 2006 to Supervalu, a Minneapolis grocery company; and sold the Albertsons-branded stores Supervalu didn’t want to a partnership made up of Cerberus and several real estate firms. When Supervalu couldn’t make its purchase work, the Cerberus group bought Supervalu’s old Albertsons Inc. stores from Supervalu in 2013 for about $3 billion.

Since 2012, Albertsons has grown from 192 stores to 2,318 under several banners. A big driver of that expansion came in 2014 when the Cerberus partners agreed to buy Safeway, another supermarket chain, for $9.2 billion – creating a grocery giant.

Still, Albertsons has struggled, in some markets, to distinguish itself from competitors. Amazon’s acquisition of Whole Foods last year, and Walmart’s huge investment in its grocery offerings, has only added to those challenges.

The grocer is trying out new, upscale stores, notably its rebuilt Broadway Avenue store in Boise, which opened last month — Albertsons’ first new Idaho store since 1999.

Albertsons is Idaho’s biggest company, with sales of $60 billion a year, more than twice as much as No. 2 Micron Technology Inc. Micron remains the larger Treasure Valley employer, with about 6,800 employees here vs. Albertsons’ 4,700 statewide. Albertsons employs more people nationwide.

Albertsons has struggled for profitability, though its overall financial trend line remains positive. The company slipped back into the red in its latest quarter as sales edged up only slightly.

The merger would have enabled Albertsons’ largest investors, including the private equity firm Cerberus, to cash out of their longtime investment in the chain.

“We remain excited about the improving momentum, financial strength, and industry leadership of Albertsons Companies,” the company said. “Our team has remained laser focused on execution to drive our financial and operating performance, while ensuring we continue to meet and exceed the needs of our customers.

“As a result, we have achieved a number of significant milestones, including delivering consecutive quarters of top-line and bottom-line growth, and as part of the Safeway merger, which is delivering higher than expected synergies, we will be completing the systems integration of the Albertsons stores to in-house systems in September.

“The operational improvements we are making to meet our customers’ needs are driving our improved results.””

Bob Miller
The merger’s failure is a defeat for Albertsons Chairman Bob Miller. He knew Rite Aid well: He was its chairman from 1999 to 2007 and remained a director until 2011. Rite Aid’s current chairman and CEO, John Standley, would have become CEO of the merged company.. Darin Oswald

And what does this mean for Rite Aid?

“While we believed in the merits of the combination with Albertsons, we have heard the views expressed by our stockholders and are committed to moving forward and executing our strategic plan as a stand-alone company,” said John Standley, the pharmacy chain’s chief executive.

Rite Aid had previously sought to bolster its market position in the pharmacy business by merging with Walgreens. But talks between two of the biggest drugstore chains in the United States ended after antitrust authorities indicated they were unlikely to approve the combination. Instead, Rite Aid agreed last year to sell 1,932 stores and three distribution centers to Walgreens for $4.38 billion.

Rite Aid’s board, meantime, tried to convince shareholders that Albertsons’ digital capabilities and financial strength would help the pharmacy chain grow in the face of stiff competition.

But it was hardly the transformative deal that rivals have pursued – such as CVS’s proposed merger with Aetna, the health insurer, or Walmart’s efforts to deepen its ties with Humana.

Rite Aid will face significant challenges continuing as a stand-alone company. The drugstore chain has struggled with high debt levels and tough competition, as narrowing drugstore networks have pushed customers away from its stores.

The company has neither “the scale nor the balance sheet to compete with much larger and well capitalized rivals like CVS and Walgreens,” Moody’s Vice President Mickey Chadha said in an email.

David Staats: 208-377-6417, @davidstaats