Since being left at the altar by Walgreens Boots Alliance Inc (NASDAQ:WBA) last month, Rite Aid Corporation (NYSE:RAD) has looked like a dead company walking to investors, losing one-third of its value. Its market cap as trade, opened July 21, was down to $2.73 billion, for what would be, assuming Walgreens’ new deal goes through, 2,435 pharmacies and pharmacy benefit manager Envision RX.
RAD stock investors seem to believe, as we were led to believe, that Walgreens has picked the bones of Rite Aid clean and that what is left is not worth looking at.
But is that true? Or might a strategic buyer, public or private, be found that can make lemonade out of this lemon? Before abandoning RAD stock to the wolves, it might be wise to see if it is still breathing.
RAD Stock: Any Value Left?
One analyst who has been poring through the books thinks the company is worth at least $4.8 billion after the Walgreens deal closes. After all, Rite Aid is getting $5.5 billion in cash to lay against $7.178 billion in debt, and if you value the remaining stores as Walgreens did, they should be worth $4.4 billion.
What’s left is an equity value of $6.4 billion matched against a debt load of $1.5 billion. That’s a debt-to-equity load of 23%, comparable to that of CVS Health Corp (NYSE:CVS). Depending on which stores are left it is a viable business.
Fred’s, Inc. (NASDAQ:FRED), a deep discounter based in the Southeast, was originally slated to take 865 of the stores to get the deal past regulators, but since it was unwound, it’s in worse shape than RAD stock, down 32% with a market cap of just $258 million. It’s not going to be a buyer of anything right now.
But a private equity buyer might be able to take both Rite Aid and Fred’s out, right now, for $5.5 billion in cash, combining the valuable units, cashing out on the worthless ones, and walk away with a fat profit. Is that worth waiting for? It might be.
Given the location of both the remaining Rite Aid and Fred’s units, this is not a company Amazon.com, Inc. (NASDAQ:AMZN) is going to take out. These are small towns, mostly in the Southeast, with customers of modest income, probably the last group you’ll see going to an online merchant. Fear of Amazon is driving retailers’ equity to near-zero, and in the near-term the move looks overdone.
But Who Would Buy Rite Aid?
If the managers now in place, who are still in their 40s or 50s, can keep the company afloat until a buyer is found, that buyer may be getting a bargain. But who would be the buyer? Even a private equity firm would be looking for an operator to take over down the road.
Cerberus Capital had bid against Fred’s when Walgreens was trying to get its first Rite Aid deal done, and might be interested in combining it with Albertson’s, a grocery chain it owns. As many as a dozen private equity firms were reportedly kicking the tires on Rite Aid before last month’s announcement, and some might still be interested.
A private equity buyer might be able to grab the cash, take the stores to bankruptcy to get their money out, and be left with Envision, which had a $6 billion/year sales run rate according to Rite Aid’s latest 10-Q.
The bottom line is that while there is substantial risk in RAD stock and there is also substantial value, and a private equity buyer might give public shareholders a small profit, in a short time frame, if they are inclined to hang on.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN.
